Strategy Formulation in Entrepreneurial Firms

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STRATEGY FORMULATION IN ENTREPRENEURIAL FIRMS

To my family

Strategy Formulation in Entrepreneurial Firms

AZHDAR KARAMI Bangor Business School University of Wales Bangor, UK and University of Tabriz, Iran

© Azhdar Karami 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Azhdar Karami has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identiﬁed as the author of this work. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hampshire GU11 3HR England

Ashgate Publishing Company Suite 420 101 Cherry Street Burlington, VT 05401-4405 USA

Ashgate website: http://www.ashgate.com British Library Cataloguing in Publication Data Karami, Azhdar Strategy formulation in entrepreneurial ﬁrms 1. Strategic planning 2. Entrepreneurship I. Title 658.4'012 Library of Congress Cataloging-in-Publication Data Karami, Azhdar. Strategy formulation in entrepreneurial ﬁrms / by Azhdar Karami. p. cm. Includes bibliographical references and index. ISBN 978-0-7546-4792-8 1. Small business--Management. 2. New business enterprises--Management. 3. Strategic planning. 4. Business planning. 5. Entrepreneurship. I. Title. HD2341.K287 2007 658.4'012--dc22 2007011098 ISBN: 978-0-7546-4792-8

Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire.

Contents List of Figures List of Tables Preface Acknowledgments

ix xi xiii xv

1

Introduction to Strategy and Entrepreneurship Introduction Strategic Management Process Stages of Strategic Management What Is Entrepreneurship? Approaches to Entrepreneurship Studying Strategy in Entrepreneurial SMEs The Rationale for Studying Strategy and Entrepreneurship Integration of Strategic and Entrepreneurial Thinking Structure of the Book References

1 1 13 15 17 17 18 20 21 22 23

2

Strategy Formulation in Small and Medium-Sized Enterprises Introduction Theoretical Background of Strategy in Entrepreneurial SMEs Rational Model of Strategy Intuitive Learning Model of Strategy Conceptualization of Strategic Planning Strategy Formulation Phases in SMEs Strategic Management Model for Entrepreneurial SMEs Developing a Meaningful Mission Statement Developing Business Strategies for SMEs Specialization and Diversiﬁcation Competitive Strategies for SMEs Electronic Commerce (EC) and SME Business Strategies Strategy implementation in SME Strategy Evaluation and Control Summary and Conclusion References

31 31 31 32 33 35 36 39 44 46 46 49 52 55 58 59 60

3

Researching Strategy Introduction

67 67

vi

Strategy Formulation in Entrepreneurial Firms

Methodology in Management Researches: A Positivistic Approach Overview of Research Methods Employed in Strategic Management Research Design: Qualitative or Quantitative Research? Research Process Objectives of Study and Research Questions Research Hypotheses The Sample The Dynamic SME Strategic Management Model Deﬁning Research Variables The Methods of Data Collection Selection of Data Collection Techniques Data Analysis Summary and Conclusion References 4

67 69 70 75 76 77 78 80 83 84 88 94 97 97

Data Analysis and Major Findings Introduction Company Details Managerial Characteristics of the Respondents Strategic Planning Activities Developing Objectives and Mission Statement in the Studied SMEs Environmental Analysis in Small and Medium-sized Enterprises Strategy Implementation in SMEs Strategic Management and Organizational Factors Firm Performance Measurement Summary and Conclusion References

103 103 103 105 110

5

Strategic Entrepreneurship Introduction Characteristics of Successful Entrepreneurs Nature of Strategic Planning in Entrepreneurial SMEs Strategic Management Approach and Organizational Factors Business-owner Entrepreneurs and Strategic Planning Managerial Characteristics and Strategy Development Strategic Awareness of the Managers Managing Resource Capabilities Summary and Conclusion References

129 129 130 132 135 138 139 144 146 150 151

6

Crafting Strategy and Environmental Context Introduction Elements of Corporate Strategy

157 157 158

113 115 120 122 124 126 126

Contents

Business Level Strategy Effective Strategy Formulation and Implementation Process in SMEs Strategic Planning Tools Developing Mission Statement and Objectives in SMEs Industry and Environment Analysis in SMEs Strategic Planning: Formal or Informal? Strategy Development and Human Resources Involvement Strategic Characteristics and Performance of the Entrepreneurial Firms Summary and Conclusion References 7

Index

Final Lessons and Conclusion Introduction Research questions and objectives of the study Summary of Major Findings Theoretical Contribution Policy Implications Some Learning Points for SME managers Limitations of the Study Suggestions for Further Research

vii

163 165 166 166 170 176 179 182 183 185 189 189 190 190 194 196 197 198 199 201

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List of Figures Figure 1.1 Figure 1.2

Evolution in strategic management theories Strategic management process

10 14

Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5

Three phases of strategy formulation in SMEs Strategy development model for new ventures The product market matrix Phases and forms of internationalization for SMEs Generic competitive strategies and their attraction to SMEs

38 39 47 49 51

Figure 3.1 Figure 3.2 Figure 3.3

The structure of quantitative research process Contingent approach to research method Dynamic strategic management model in entrepreneurial SMEs

72 74 82

Figure 4.1 Figure 4.2 Figure 4.3 Figure 4.4 Figure 4.5 Figure 4.6 Figure 4.7 Figure 4.8

104 104 106 107 108 109 110

Figure 4.9 Figure 4.10

Demographic proﬁle of respondents Annual turnover of studied ﬁrms The age groups of respondents The total years of work experiences of respondents Educational level of respondents Respondents’ educational background Employing business plan in the studied ﬁrms Classiﬁcation of the studied ﬁrms in terms of their involvement in planning activities Mission statements in SMEs Importance of environmental factors in strategic management

Figure 6.1

Strategy levels

158

112 113 117

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List of Tables Table 1.1 Table 1.2

Three models of strategy Four perspectives on strategy

Table 2.1

Table 2.3

The differences between rational and learning models for strategic planning Comparison analysis of the use of strategic planning construct Strategies used by SMEs

Table 3.1 Table 3.2 Table 3.3 Table 3.4

Qualitative versus quantitative research European Commission’s deﬁnition of SMEs Measurement level of the research variables, some examples Data analysis plan: Employed statistical tests

74 79 92 96

Table 4.1 Table 4.2

Demographic proﬁle of the respondents (percent) The cross tabulation of age and work experiences of respondents Importance of environmental factors in the ﬁrm’s decision-making process Importance of environmental factors in strategic management Descriptive statistics of industry strengths factors Environmental analysis by ﬁrm size Descriptive statistics of the strategy implementation variables One-sample test on strategy implementation variables Impact of strategic management approach on organizational factors

105

Table 2.2

Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9

Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7

Planning levels and characteristics of the studied ﬁrms Impact of strategic management approach on organizational factors Senior managers’ involvement in strategic planning ANOVA table for age of respondents ANOVA table for CEOs’ experiences and education Strategic awareness of respondents, results of t-test The differences between high and low performance ﬁrms in terms of their capabilities

6 7

34 37 54

108 115 116 118 119 120 121 122 134 135 138 140 142 145 148

xii

Table 5.8

Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8 Table 6.9 Table 6.10 Table 6.11

Strategy Formulation in Entrepreneurial Firms

The differences between high and low performance SMEs in terms of innovation Generic business strategies Components of mission statements identiﬁed by empirical researches A comparison of mission statements in high and low performance SMEs Importance of environmental analysis, results of t-test The result of correlation analysis on environmental scanning Impacts of environmental factors on developing strategy within studied ﬁrms, results of t-test ANOVA results on environmental scanning and ﬁrm performance Formal strategic planning in SMEs, results of t-test HR involvement in strategic activities within high and low performance ﬁrms Results of Kruskal-Wallis test on HR capabilities, involvement in strategy, and ﬁrm performance Strategic characteristics of low and high performance ﬁrms

149 164 167 170 172 173 174 176 177 181 182 184

Preface The past decade of organizational research has moved from an investigation of organizational static to an investigation of organizational dynamics, much of it focused on strategy and its formulation and implementation. While the volume of research on strategic management in large ﬁrms is extensive, the research on strategic management in small and medium-sized enterprises in general and entrepreneurial ﬁrms in particular is more limited. In short, research into strategic management, to date, has come a long way since 1960s. Many of the earlier theories are still valid and are reﬂected in the assumptions of the contemporary writers on the subject. The recent theories including the present work, have shifted the focus on strategy processes in entrepreneurial small and medium enterprises. As shown above there has been an over emphasis on the leaders and strategists at corporate level and international organizations. This preoccupation with big organizations on the part of the writers and theorists has created a vacuum for scholars and practitioners alike who work or deal with small and medium sized ﬁrms in the industry. The present work is a direct response to this perceived need. It raises questions such as, what is the strategic role of entrepreneurship in small businesses. How top management of the small ﬁrms perceives the processes associated with strategy formulation? How business strategies are formatted and implemented in entrepreneurial SMEs? And more importantly, are there lessons that can be learnt by giant corporations from the smaller ones? These and other concerns form the focus of this novel study. This study focuses on top management of the small and medium-sized enterprises in the UK. The sample covers a wide range of the entrepreneurial ﬁrms in terms of their activities within the industries, operating in SME sector. By and large this book highlights the issue of lack of strategic thinking in managing small ﬁrms. This book reports that, the ﬁrms which employ strategic management techniques, whether formal or informal, exhibit enhanced levels of success in formulation and implementation of business strategies than those ﬁrms which do not employ such procedures. It has been concluded that there is a signiﬁcant association between senior manager’s characteristics and initiating strategic orientation in the SMEs. Establishing a scanning system as part of strategic management process, is necessary for the formulation and planning of business strategies; increasing proﬁt; and growth rate of the ﬁrm, and developing the ﬁrm’s adaptability with unexpected environmental changes in a turbulent marketplace. Generally speaking, successful entrepreneurial SMEs emphasis on long term plans, objectives and ongoing evaluation in strategic planning. They employ a multi-disciplinary management team in strategic decisionmaking process and increase employees’ motivation through involvement of them in the strategic activities. Finally this research suggests that suggest that management

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Strategy Formulation in Entrepreneurial Firms

should develop a strategic orientation in the business as it grows through the implementation of an effective strategic management process. Azhdar Karami

Acknowledgments The author wishes to acknowledge the contributions of colleagues who have been either directly or indirectly involved in the presentation of this volume. I would like to thank Professor F. Analoui from Bradford University, UK for his professional comments and reviewing this book. Professor N. Kakabadse from Northampton Business School, Northampton University, UK and Professor M. Branine form Dundee Business School, University of Abertay Dundee, UK for their valuable comments. I would like to thank Department of Economics, University of Tabriz, Iran for supporting the original work. Last but by no means least, I would like to offer my sincere thanks to Janet Analoui for undertaking unenviable task of editing the ﬁnal copy of the book.

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Chapter 1

Introduction to Strategy and Entrepreneurship Introduction Strategic Entrepreneurship has been recognized as an important factor that contributes to a ﬁrm’s success. Despite the potential beneﬁt of strategic entrepreneurship for sustaining entrepreneurial ﬁrms, this area has been under researched in the small and medium enterprises literature. However research into strategy formulation and implementation, particularly in small and medium-sized enterprises (SMEs), recently has become one of the main focuses of both academia and industry (Berry, 1998; Beal, 2000; Hitt, 2000; Krishnan, 2001). Perhaps this is because, the key role of SMEs is in generating employment, promoting innovation, creating competition and generating economic wealth (Smith, 1998; Bridge and Peel, 1999). Strategic management is fundamentally about setting the underpinning aims of an organization, choosing the most appropriate goals towards those aims, and fulﬁlling both over time (Thompson, 1996). David (1995) holds that strategic management can be deﬁned as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this deﬁnition implies, strategic management focuses on integrating managerial abilities and techniques to achieve organizational success. It has been discussed (Analoui and Karami, 2003) that the dominant paradigm in strategic management is a prescriptive, rational and analytic model characterized by two principle functions: strategy formulation and implementation. The major contributors to this approach are Ansoff (1965); Andrews (1986) and Porter (1979, 1980, p. 1985) from Harvard University. It has been argued that strategic management is about how the strategy is developed and implemented (Cole, 1994). Strategy formulation is how the ﬁrm chooses to deﬁne strategy and how it approaches implementation through strategic management (Collin, 1995; Bowman, 1998). The approach to strategy formulation dictates the eventual management style. The nature of the strategy formulation will therefore result in the adoption of a speciﬁc approach to strategic management. The development of a strategy can be formal or rational (Mintzberg, 1994), emergent or progressed (Whittington, 1993), under a logical incremental path. Strategic management handles how a strategy is developed and where the organization’s environment is analysed before the appropriate strategy is selected and implemented (Hambrick, 1981; Wheelen and Hunger, 1998). Even though some have concluded that small ﬁrms do not commonly practice strategic management (Gable and Topol, 1987), there have been several studies that have found a positive relationship between strategic planning and performance in

2

Strategy Formulation in Entrepreneurial Firms

these companies. For example, Robinson (1982) found that small businesses that employed consultants to help with strategic planning performed better than ﬁrms that did not. Bracker, Keats and Pearson (1988) found that small electronics ﬁrms that engaged in sophisticated strategic planning performed better than unstructured planners. Several other studies have reported positive relationships between formal strategic planning and ﬁnancial performance in small ﬁrms (Wood, Johnston and DeGenaro, 1988; Watts and Ormsby, 1990). Still others have reported positive relationships among various measures of strategy content and small ﬁrm performance (Miller and Toulouse, 1986; Bracker, Keats and Pearson, 1988). Proponents of strategic management in SMEs have suggested that the type of planning employed will be contingent upon its stage of development and that this activity will evolve and become more formal and sophisticated over the life cycle of the business (Robinson et al., 1984; Scott and Bruce, 1987). The literature suggests that as the activities and supporting functional areas of the organizations become more complex, strategic management will develop through various stages from its initial beginnings as simple ﬁnancial plans and budgets, through to forecast-based planning, externally orientated planning where the managers begin to think strategically, proactively planning the ﬁrm’s future and formal strategic management techniques (Goodwin and Hodgett, 1991; Foster, 1993; Berry, 1998; Apfelthaler, 2000; Beal, 2000). It is often argued that the managers must make this necessary progression toward a strategic orientation and more sophisticated strategic management techniques as the business grows in order to ensure the future survival and long term success of the company (Hitt, 2000; Wolff, 2000). Finally, it is important to recognize that in studying strategic management practice in small and medium-sized ﬁrms, the role of the entrepreneur is critical (McGrath and MacMillan, 2000; Meyer and Heppard, 2000). In business, preparation comes through strategic planning (Analoui and Karami, 1993). Many owners and managers of small businesses routinely plan their day-to-day operations, but do not believe that strategic planning applies to them. However, it has been discussed that, no business is too small to require a sound strategy, and few strategies are so simple that they need not be developed into a strategic plan (Robinson and Pearce, 2001). The entrepreneur’s personal goals, characteristics and strategic awareness will all signiﬁcantly impact on the development of the business (Daft, Sormunen and Parks, 1988; McKenna, 1996). Previous studies have already shown that whether or not an effective strategy development process is implemented will be heavily inﬂuenced by the ﬁrm’s owner manager and that the ability to comprehend and make appropriate use of sophisticated strategic management practice is a function of the entrepreneur’s previous experience (McKenna, 1996; Berry, 1998; Chan and Foster, 2001). Origin of Strategy Before reviewing the core research background related to strategic management in entrepreneurial small and medium sized enterprises, it is necessary to clarify the term because of the troublesome intellectual terrain that strategy in management occupies. Let us ﬁrst be clear as to what strategy is. What is the origin of strategy? Where does the word strategy come from? In the case of the origin of strategy,

Introduction to Strategy and Entrepreneurship

3

Luttwak (1987) has contended that as in the case of many scientiﬁc terms, the word “strategy” (French strategie; Italian strategia) is derived indirectly from the Greek strategos (general), which does not carry the connotation of the modern word. The Greek equivalent for our “strategy” would have been strategike episteme (general’s knowledge) or strategon sophia (generals’ wisdom). On the other hand strategemata (strategematon is the Greek title of the Latin work by Frontinus) describes a compilation of strategema, precisely “stratagems” or tricks of war (ruses de guerre). Characteristically, a modern American deﬁnition of ofﬁcial military origin is much more inclusive: ‘The art and science of developing and using political, economic, psychological and military forces as necessary during peace and war, to afford the maximum support to policies, in order to increase the probabilities and favourable consequences of victory and to lessen the chances of defeat’ (Luttwak, 1987, pp. 239−240). Deﬁnition of Strategy in Management The word strategy has long been used implicitly in different ways (Bowman and Kakabadse, 1997; Mintzberg and Quinn, 1998). The term strategy has been conceptualized in diverse forms according to the parent social science discipline of numerous authors (Mintzberg, 1994; Marsh, 1999). The concept of strategy in business and management is analogous to that in war. Strategy as an area of management that is concerned with the general direction and long-term policy of the business as distinct from short-term tactics and day to day operations. Hence, the strategy of business may be deﬁned as it’s long-term objectives and the general means by which it intends to achieve them (Segal-Horn, 1998). Explicit recognition of multiple deﬁnitions can help us to manoeuvre through this ﬁeld. Accordingly, some deﬁnitions of strategy in management are presented here and their relevant interrelationships are then considered. One early deﬁnition of strategy was provided by the American business historian, Chandler (1962), who suggested: strategy is the determination of the basic long term goals and objectives of an enterprise, and the adaption of courses of action and the allocation of resources for carrying out those goals (1962, p. 13).

He subscribes to the widely-held view that strategy is as much about planning and deﬁning goals and objectives as it is about providing the means for achieving them. A more continuous and interactive deﬁnition of strategy, has been offered by Hofer and Schendel (1978): strategy is a fundamental pattern of present and planned resource deployments and environmental interactions that, indicates how the organization will achieve its objectives (1978, p. 25).

Another commentator Andrews (1986) deﬁnes strategy as: …a pattern of decisions… (which represent)… the unity, coherence and internal consistency of a company’s strategic decisions that position a company in its environment

Strategy Formulation in Entrepreneurial Firms

4

and give the ﬁrm its identity, its power to mobilise its strengths, and its likelihood of success in the marketplace (Andrews, 1986, p. 112).

Mintzberg and Quinn (1998) identiﬁed interrelated deﬁnitions of strategy. Strategy as a plan: by this deﬁnition, strategies have two essential characteristics. They are made in advance of the actions to which they are applied and they are developed consciously and purposefully. A strategy is the means used to achieve the objectives of the organization. A strategy is not just a plan, it ties together all the parts of the organization. Strategy covers all major aspects of the ﬁrm and through strategy all parts of the ﬁrm are compatible with each other and ﬁt together well. As a plan strategies may be general or they can be speciﬁc. ‘A strategy is the pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well-formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on it’s relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents’ (Mintzberg and Quinn, 1998, p. 3). Strategy as pattern: deﬁning strategy as a plan is not sufﬁcient; we also need a deﬁnition that encompasses the resulting behaviour. Thus, strategy is proposed as a pattern, ‘speciﬁcally a pattern in a stream of actions’ (Mintzberg and Quinn, 1998, p. 11). The deﬁnition of strategy whether as plan or pattern can be quite independent of each other: plans may go unrealized, while patterns may appear without preconception. Mintzberg, Quinn and Ghoshal (1995) argued that, ‘if we label the ﬁrst deﬁnition intended strategy and the second realized strategy, then we can distinguish deliberate strategies, where intentions that existed previously were realized, from emergent strategies, where patterns developed in the absence of intentions, or despite them which went unrealized’ (1995, p. 15). Strategy as position: the third deﬁnition is that strategy is a position-speciﬁc, a means of locating an organization in what organization theorists like to call an ‘environment’ (Mintzberg and Quinn, 1998, p. 13). By this deﬁnition, strategy becomes the mediating force or match between organization and environment, that is between the internal and the external context. Strategy as a position looks outside the organization, seeking to locate the organization in the external environment and place it in a concrete position. Strategy as perspective: a fourth deﬁnition of strategy looks inside of the organization. Strategy in this respect is to the organization what personality is to the individual (Mintzberg, Quinn and Ghoshal, 1995). The deﬁnition of strategy as a perspective, suggests that strategy is a concept. In this case strategy is a perspective shared by the members of an organization through their intentions and/or by they actions (Mintzberg and Quinn, 1998). Strategy as both position and perspective can be compatible with strategy as plan and/or pattern. But in fact, the relationship between these different deﬁnitions can be more involved than that. Johnson and Scholes (1993) describe strategy as being concerned with: • • •

the full scope of an organization’s activity, the process of matching the organization’s activities to its environment, the process of matching the organization’s activities to its resource capabilities,

Introduction to Strategy and Entrepreneurship

• •

5

having major resource implications and, being affected by the values and beliefs of those who have power in an organization.

Johnson and Scholes (1993) in their empirically-grounded text on exploring corporate strategy, categorize a number of different approaches to strategy as follow: •

• •

•

•

•

A ‘natural selection’ view, that is where organizations are under great environmental pressure and have constantly to adapt to changes in their environment. A ‘planning’ view, that is where strategy comes about through highly systematized forms of planning; this is the rational approach to strategy. A ‘logical incremental view’, that is an evolutionary step-by-step approach to strategy; it is an adaptive approach but one which is more controlled by them than the natural selection example mentioned above. A ‘cultural view’, that is an approach to strategy based on the experiences, assumptions and beliefs of management over time and which may eventually permeate the whole organization. A ‘political view’, that is where strategy emerges after a variety of internal battles, in which managers, individuals and groups bargain and trade their interests and information. A ‘visionary view’, that is where the strategy is dominated by one individual, or sometimes a small group, who have a particular vision of where the organization can and should be; this is a particularly intuitive approach.

Chaffee (1985), whose tripartite classiﬁcation of strategy is presented in Table 1.1, attention should be thus focused more on means, with goals seen as an alignment of the organization and its environment. Lower level changes in style, marketing of quality, are seen as strategically important. Although top managers are still seen as responsible for guiding strategy, other managers are clearly involved in the process (Chaffee, 1985). Of the associated terms that are regarded as important variables by Chaffee, strategic management appears in each of his three classiﬁcations of strategy. When strategy is linear, strategic management takes the form of long range planning; when strategy is adaptive, strategic management balances strategic ﬁt to company predisposition. Finally, when strategy is interpretive, strategic management can be regarded as a vital capability for the continuous improvement of quality performance. Evolution of Strategy Theory Over the last 30 years there have been many developments in the ﬁeld of strategic management. Many of the concepts that form the current approaches were developed over the recent decades. Among the main concepts developed during the 1960s and 1970s were the product life cycle, the experiences curve, the strategic business unit (SBU), and the growth share (portfolio) matrix. The Boston Consulting Group was

Strategy Formulation in Entrepreneurial Firms

6

Table 1.1

Three models of strategy

Variable

Linear Strategy

Adaptive Strategy

Interpretive Strategy

Sample deﬁnition

“…determination of the basic long term goals of an enterprise, and the adaption of courses of action and the allocation of resourcesnecessary for carrying out these goals” (Chandler, 1962, p.13)

Orienting metaphors constructed for the purpose of conceptualising and guiding individual attitudes of organizational participants (Chaffee, 1985, p. 94).

Nature of strategy Focus for strategy

Decisions, actions, plans integrated Means, ends

“strategy is fundamental pattern of present and planned resources deployments and environmental interactions that, indicates how the organization will achieve its objectives” (Hofer and Schendel, 1978, p.25). Achieving a “match” Multifaceted Means

Aim of strategy Strategic behaviour

Goal achievement

Associated terms

Strategic plannin, strategy formulation and implementation

Associated measures

Formal planning, new products, conﬁguration of products or business, market segmentation and focus, market share, merger/ acquisition, product diversity

Change markets, products

Source: Adapted from Chaffee, (1985) Review, Vol. 10, no.1, pp. 89-98.

Coalignment with the environment Change style, marketing quality

Metaphor Interpretive participants and potential participants in the organization Legitimacy Develop symbols, improve interactions and relationships Strategic norms, emergent strategic management, strategy ﬂexibility

Strategic management, strategic choice, strategic predisposition, strategic trust, strategic design, strategic ﬁt, niche Measures must Price, distribution be derived from policy, marketing context, may expenditure and require qualitative intensity, product evaluation, demand differentiation, responsiveness authority changes, proactiveness, risk taking, multiplexity, integration, futurity, adaptiveness, uniqueness Three models of strategy, Academy of Management

the dominant inﬂuence (Leavy, 1996) in forming the above views. In the 1960s and 1970s the emphasis was primarily on strategies for growth, diversiﬁcation and vertical integration. The 1980s were dominated by the contribution of Michael Porter

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7

in the ﬁeld of strategic management including the ﬁve-force model (1979), generic strategies (1985) and the value chain (1985). During the low-growth 1980s, the emphasis in the ﬁeld of strategy shifted towards competitivism and renewal, particularly in the core, and often in the nature of the business. There is a growing belief that the business world in 2000s is facing a whole new set of priorities such as the increasing globalization of competition, new information and technology (Leavy, 1996). These developments are changing the nature of business and competition in several ways. Perhaps strategy is the main essence of management, pulling together all of the strands required to run any organization in response to competition in the operative environment. The scholars in the ﬁeld of strategy (Ansoff, 1965; Williamson, 1991; Stacey, 1993; Whittington, 1993; Mintzberg, 1994) have produced a variety of deﬁnitions of business strategy reﬂecting in some cases signiﬁcantly differing approaches to the subject. Whittington (1993) identiﬁed four main approaches in strategy. These consist of the classical (traditional) approach, the evolutionary approach, the processual approach and the systemic approach. The classical and evolutionary approaches see proﬁt maximization as the natural outcome of strategy-making; the systemic and processual approaches are more pluralistic, envisioning other possible outcomes as well as just proﬁt. The four discussed approaches to strategy differ widely in the ways they provide advice to top management. The Classical school conﬁdently prescribes a rational and sequential approach offered as a universal form. The Evolutionary and Processual approaches are more cautious, each sceptical of the strategist’s capacity to direct strategy in this rational hierarchical way. And System theorists take a more relativists stance insisting that both the ends and means of strategy depend on the character of prevailing social systems (Whittington, 1993) (see Table 1.2). Table 1.2

Four perspectives on strategy

Strategy

Classical Formal

Processual Crafted

Evolutionary Efﬁcient

Systemic Embedded

Proﬁt Maximization

Vague

Survival

Local

Internal (Plans)

Internal (Political/ Cognitions)

External (Markets)

External (Societies)

Psychology

Economics/ Biology

Sociology

Rational Focus

Key InﬂuenceEconomic/Military Key Authors

Chandler Ansof Porter

Cyert & March Mintzberg Pettigrew

Hannan & Freeman Williamson

Granovetter Marris

Key Period

1960s

1970s

1980s

1990s

8

Strategy Formulation in Entrepreneurial Firms

The main characteristics of the four approaches are illustrated in Table 1.2 The Classical approach stresses rationality and analysis. For the classical approach strategy should be formal and explicit, it’s objective unambiguous proﬁt maximization. The Evolutionary approach stresses the unpredictability of the environment which makes irrelevant much of what is traditionally regarded as strategic analysis (SegalHorn, 1998). Evolutionarists believe that high proﬁtability and efﬁciency are essential for survival. Processual theorists too dismiss Classical formality, viewing strategy as ‘crafted’, it’s goals are vague and any logic often emerging in retrospect (Whittington, 1993). In contrast, the Systemic approach stresses the importance and to an extent, the uniqueness of social systems within which diverse attitudes to and conceptualization about strategic issues occur (Segal-Horn, 1998). Changing Paradigm of Management Mintzberg, Quinn and Ghoshal (1995) argued that, if you ask managers what they do, they will most likely tell you that, they plan, organize, coordinate and control. The fact is that, these four words, which have dominated management vocabulary since the French industrialist Henry Fayol ﬁrst introduced them in 1916, tell us little about what management is. So let us shed light on some deﬁnitions of management. Koontz and Weihrich (1990) have deﬁned management as, …the process of designing and maintaining an environment in which individuals, working together in groups, efﬁciently accomplish selected aims (Koontz and Weihrich, 1990, p. 4).

It was suggested that, as managers, people carry out the managerial functions of planning, organizing, stafﬁng, leading and controlling. Moreover, managing is concerned with productivity; this implies effectiveness and efﬁciency. Daft (2000), contends that, management often is considered to be a universal phenomena, because it uses organizational resources to accomplish goals and attains high performance in all types of proﬁt and non-proﬁt organizations. He has therefore deﬁned it as, “management is the attainment of organisational goals, in an effective and efﬁcient manner through planning, organizing, leading, and controlling organizational resources” (Daft, 2000, p. 7).

Two important points are: 1) the four functions of planning, organizing, leading, and controlling and 2) the attainment of organizational goals in an effective and efﬁcient manner. Managers, as we are all aware, use a multitude of skills to perform these functions (Analoui, 2000). The world of organizations and management is also changing (Stoner, Freeman and Gilbert, 1995; Daft, 2000). Rapid environmental changes are the cause for fundamental transformations with a dramatic impact on the managers’ job. These transformations in turn, represent a shift from a traditional to a new paradigm of management (see Table 2.1). A paradigm is a shared mind-set that represents a fundamental way of thinking about, perceiving, and understanding the world (Daft, 2000). Traditionally, the whole organization has been coordinated and controlled through the vertical hierarchy, with decision making authority residing with upper-

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level managers. Within the new paradigm, the primary responsibility of managers is not solely deﬁned as making decisions, but rather to create learning capability throughout the organization (Jordan and Jones, 1997). In the learning organization, top managers are leaders who create a vision for the future that is widely understood and imprinted throughout the organization. Employees are empowered to identify and solve problems because they understand the vision and long-term goals of the organization (Pfeffer, 1995). The most striking change now affecting organizations and management is globalization. Taking a global view of the world has become a necessity for virtually every company and manager (Kakabadse, Kakabadse and Myers, 1996). Global competition has also triggered a need for new management approaches that emphasize empowerment of workers and involvement of employees. Today managers have to understand crosscultural patterns and often work with team members from many different countries. Diversity of the workforce has become a fact of life for all organizations, even those that do not operate globally. Another signiﬁcant shift in management paradigm is that, technology is electronic rather than mechanical. Information technology facilitates new ways of working, such as virtual teams and telecommunications that challenge traditional methods of management and control (Daft, 2000). In the face of these rapid transformations, organizations are learning to value change over stability. The fundamental paradigm during much of the twentieth century was a belief that things can be stable and efﬁcient. In contrast, the new paradigm is based on the presence of change and chaos as the natural order of things (Tetenbaum, 1998). The change to the new paradigm of management means that managers now must rethink their approach to organizing, directing, and motivating workers (Daft, 2000). The Strategy in Management Context For almost two decades, managers have been learning to play a new set of roles (Shay and Rothaermel, 1999). It is advocated that, companies must be ﬂexible to respond rapidly to competitive and changing market (Porter, 1998). In order to understand the problems which result in success or failure for a company, it is necessary to begin by deﬁning some concepts. Terms such as business policy, corporate strategy, strategic planning, and strategic management seem to be used interchangeably, while the various component terms relating to strategy formulation are not clearly deﬁned. A concept which takes in the full scope of management tasks at both corporate and functional level is that of the ‘strategy’ concept (Marsh, 1999; Webb and Pettigrew, 1999). The term ‘strategy’ has been deﬁned as ‘the pattern of objectives, purpose or goals, and major policies and plans for achieving these goals, stated in such a way as to deﬁne what business the company is in or is to be in and the kind of company it is or is to be’ (Luffman et al., 1991, p. 4). Strategy is the way in which a corporation endeavours to differentiate itself positively from it’s competitors, using it’s relative corporate strengths to better satisfy corporate needs (Ohmae, 1983, p. 93). To understand what strategic management is all about, it is helpful to look at its history and review its core ideas. Strategic management grew out of both teaching and research in business administration. On the teaching side, the roots were the business policy or general management classes that by the 1960s most business schools

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required as the ‘capstone’ course at the end of the business curriculum (Goldsmith, 1995). Business policy professors were forced to try to think systematically about companies strategies which eventually led them into the self-styled study of strategic management (Schendel and Cool, 1988). On the research side, four main periods can be distinguished in the evolution of strategic management theories (Figure 1.2). Theoretically, the recent theories of strategic management such as the resourcebased view of the ﬁrm (Boxall, 1996), have turned attention towards the internal aspects of the ﬁrm, its characteristics represented the crucial research domain in the early development of strategic management (Hoskisson et al., 1999). Early strategy researchers such as, Andrews (1986) and Ansoff (1965) were more concerned with identifying ﬁrms’ ‘best practices’ that contribute to the ﬁrm’s success. The researchers in this stream share an interest in pondering the inner growth engines or ‘the black box’ of the ﬁrm, and argue that, a ﬁrm’s continued success is chieﬂy a function of its internal and unique competitive resources (Hoskisson et al., 1999). During the next development period, strategic management departed, theoretically and methodologically, from the early period to the industrial organization (IO) economics period. Developments in the ﬁeld, beginning in the 1970s, fostered a move toward IO economics (Porter, 1980, 1985), with its theoretical roots based on Mason (1939) and Bain (1968); Hoskisson et al. (1999) argued that, this swing shifted the attention externally toward industry structure and competitive position in the industry. Industrial organization economics considers the structural aspect of an industry, whereas works on strategic groups are largely focused on ﬁrm grouping

Figure 1.1

Evolution in strategic management theories

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within an industry (Hoskisson et al., 1999). Strategic groups and competitive dynamics are popular research areas in the current ﬁeld of strategic management. Within the third period of developing strategic management theories, a swing back toward the ﬁrm can be clearly observed. The re-emergence of internal ﬁrm characteristics is evident in the emphasis which has been placed on competitive dynamics and boundary relationships between the ﬁrm and its environment (Hill and Jones, 1995; Heene, 1997; Hoskisson et al., 1999). Compared with industrial organization economics, strategic management moves much closer to the ﬁrm and direct competitive rivalry between speciﬁc ﬁrms in the competitive environment (Chen, 1996). Finally, and more recently, the popularity of the resource-based view of the ﬁrm has once again returned the focus to the inside of the ﬁrm. Theoretically, the central premise of the resource-based view of the ﬁrm addresses the fundamental questions of why ﬁrms are different and how ﬁrms achieve and sustain competitive advantage (Boxall, 1992, 1996; Grant, 1998; Hoskisson et al., 1999). Strategic Management Goldsmith argued that ‘the area had its genesis in the ﬁndings from the study of business case studies in the 1950s and 1960s, that companies in the same industry could succeed following different approaches, while other companies that followed approaches similar to each other were not equally successful’ (1995, p. 2). Orthodox economic theory could not explain these anomalies; corporate strategy could. For example, several companies might do well in one line of trade by employing strategies of purchasing different market niches. Other companies however, might fail with similar strategies because their strategies did not match the unique assets and talents these other ﬁrms brought to bear. The question raised therefore is, what is this powerful force called ‘corporate strategy’? One of the pioneers of strategic management Kenneth Andrews has noted ‘corporate strategy is the pattern of major objectives, purposes or goals, and essential policies and plans for achieving these goals, stated in such a way as to deﬁne what business the company is in or is to be’ (1986, p. 28). Subsequent writers have also argued that the word organization can be substituted for corporate in deﬁnition so that the notion of strategy can be applied to any formal human collectively (Hitt, 1985; Goldsmith, 1995). If organization strategy is a key to organization performance, it follows that managers ought to work in a methodical way to develop sound strategies for their organizations. Many managers started to do sophisticated long term planning; this activity was rechristened strategic planning in the 1970s to evoke the new concern for ﬁguring out how to gain an edge in the marketplace, and more importantly, how to keep it (Goldsmith, 1995). Strategic planning involved more than forecasting. From strategic planning it was a small step to today’s ﬁeld of strategic management − with greater stress on management (Ansoff, 1965). Managing strategy is not just a matter of plotting actions in advance, as the strategic planners soon learnt. It was realized that the long term course of an organization could hardly be left to a planning unit alone. Strategic management gave one answer to the problem of hollow plans. Goldsmith (1995) argued that, rather than being preoccupied with analysis of the ﬁrm and its environment and the formulation of strategies, the emerging sub-ﬁeld began to feature implementation

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and evaluation as critical components of organization success. These are the action and assessment phases of the strategic management process. He further asserted that ‘strategic management, to sum up, is a broad activity that encompasses mapping out strategy, putting strategy into action, and modifying strategy or its implementation to ensure that the desired outcomes are reached’ (Goldsmith, 1995, p. 4). Strategic management is fundamentally about setting the underpinning aims of an organization, choosing the most appropriate goals towards those aims, and fulﬁlling both over time. David (1995) holds that strategic management can be deﬁned as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this deﬁnition implies, strategic management focuses on integrating managerial abilities and techniques such as, marketing, ﬁnancial/accounting, human resource management, production management, research and development to achieve organizational success. Early theories of strategy concentrated on sequential models of corporate planning whereby sound forecasting enabled organizations to set realistic objectives and then to evaluate strategies to achieve them. Such models implied that, organizations could and should manage changes, but they were criticized for concentrating on planning and for ignoring, to a large extent, how the plans would be implemented. In other words, the managerial aspects were not sufﬁciently considered, mainly because the planning was often carried out by specialist planners who sold their plans to the board of senior managers. Nevertheless, corporate planning was popular in the 1960s. This period was one of economic stability and planners were able to convince both themselves and their directors that they could predict the future several years ahead. The oil crisis of 1973 proved them wrong. The outcome was that corporate planning was criticized as organizations found themselves in turbulent change, and long-range plans were of limited use. Ansoff and McDonnell (1990) separated goal-setting (concerned with ends) from strategy (concerned with means). On the subject of strategic management they provided the following deﬁnition: ‘… strategic management is a systematic approach for managing strategic change which consists of the following: • • •

Positioning the ﬁrm through strategy and capability planning Real-time strategic response through issue management Systematic management of resistance during strategic implementation.’

This deﬁnition favours an adaptive approach to strategic management. Accordingly, Cole (1994) provides the deﬁnition ‘strategic management is a process directed by top management, to determine the fundamental aims or goals of the organisation, and ensure a range of decisions which will allow for the achievement of those aims or goals in the long-term, whilst providing for adaptive responses in the shorter term’. Therefore, strategic management is that set of managerial decisions and actions that determines the long term performance of a corporation (Wheelen and Hunger, 1998). Wheelen and Hunger contend that, strategic management includes environmental scanning (both internal and external), strategy formulation (strategic or long range planning), strategy implementation, and evaluation and control (1998). The study

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of strategic management emphasizes on the monitoring and evaluation of external opportunities and threats in light of a corporations strengths and weaknesses. Strategic Management Process Thompson argued that the area addressed by strategic management has been deﬁned as ‘the management processes and decisions which determine the long term structure and activities of the organization’ (1996, p. 6). This deﬁnition incorporates ﬁve key themes including management process, management decisions, time scales, structure of the organizations, and activities of the organizations. What, then, is strategic management? Johnson and Scholes (1993) suggest that, it is not enough to say that it is the management of the process of strategic decision making. It should be pointed out that the nature of strategic management is different from other aspects of management. An individual manager is most often required to deal with problems of operational control, such as the efﬁcient production of goods, the management of a sale force, the monitoring of ﬁnancial performance or the design of some new system that will improve the efﬁciency of the operation. These are all very important tasks, but they are essentially concerned with effectively managing a well deﬁned part of the organization within the context and guidance of a more all embracing strategy. These tasks are vital to the effective implementation of strategy but they are not the same as strategic management. Johnson and Scholes (1993) propose that strategic management is concerned not only with taking decisions about major issues facing the organization. Also it is concerned with ensuring that the strategy is put into effect. ‘It can be thought of as having three main elements within it including strategic analysis, strategic choice and strategy implementation’ (1993, p. 16). There are different models of the strategic management process. Pitts and Lei (1996) assert that, a management process designed to satisfy strategic imperatives that push forward the ﬁrm’s vision and mission is called a strategic management process. It consists of four major steps: Analysis, Formulation, Implementation, and Adjustment/Evaluation. The strategic management process thereby begins with careful analysis of a ﬁrm’s internal strengths and weaknesses and external opportunities and threats. This effort is commonly referred to as SWOT analysis. Information derived from SWOT analysis is used to construct strategies that will enable the ﬁrm to pursue its mission. Similarly, Pearce, and Robinson (1991) in their strategic management model (see Figure 1.2) have started the process by deﬁning company mission in light of the company proﬁle and external environment and operating industry analysis. Strategies must now be formulated in a way that they match the external opportunities found in the environment with the ﬁrm’s internal strengths. For each ﬁrm this match-up is likely to be different. Pitts and Lei (1996) tell us that, in order to gain maximum competitive advantage, individual ﬁrms need to identify the activities they perform best and seek ways to maximize their effect. Effective strategy formulation is based on identifying, understanding, and using the ﬁrm’s distinctive competencies and strengths in a way that other ﬁrms can not do as well (Ansoff and McDonnell, 1990; Pitts and Lei, 1996; Bowman, 1998; Mintzberg

Strategy Formulation in Entrepreneurial Firms

14

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Figure 1.2

Strategic management process

and Quinn, 1998). In some models, the strategy formulation is the ﬁrst step towards the formulation of the strategic management process. The third element of the strategic management process is implementation. Implementation measures include organizing the ﬁrm’s tasks, hiring individuals to perform designated activities properly, and rewarding them to for carrying out those responsibilities effectively. Finally, the industry environment within which a ﬁrm operates inevitably changes over time (Bowman and Faulkner, 1997). Also a ﬁrm’s performance may occasionally fall below desired levels. Either event compels a ﬁrm to re-examine its existing approach and make adjustments that are necessary to regain high performance. Mechanisms must be put into place to monitor potential environment changes and alert managers to a development that requires modiﬁcation or adjustment of mission, goals, strategies, and/or implementation practices (Collin, 1995;

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Pitts and Lei, 1996). In order to compare and identify the strategic management model characteristics, three strategic management models were selected. These, have proved to be particularly seminal to the development, by the researcher, of a three stage strategic management model. The latter will be described in detail in this chapter. Despite differences in details and variations in wording, the three models selected for comparison show the following common features. First, strategy formulation: in this stage, there is an emphasis on company mission, business goals, and their relationship to the international nature of the external environment in which opportunities and threats are present. Second, strategy implementation: in this stage, there is an emphasis on leadership, organization structure, and their relationship to functional policies, resource allocation decisions, and the impact of operational management on organizational culture. And third, strategy evaluation: in this stage, there is an emphasis on control of activities, using performance appraisal to provide positive feedback, motivating improvement of policies and operational procedures in line with grand strategy. Stages of Strategic Management Strategies constitute a means to an end and these ends are concerned with the purpose and objectives of the organization. They are the things that businesses do, the paths they follow, and the decisions they take, in order to reach certain points and levels of success. Strategic management is a process which needs to be understood more than just as a discipline. It is the process by which organizations determine their purpose, objectives and desired levels of attainment; decide upon actions for achieving these objectives in an appropriate time scale, and frequently in a changing environment; implement the actions; and assess progress and results. Whenever and wherever necessary the actions may be changed or modiﬁed. The magnitude of these changes can be dramatic and revolutionary, or more gradual and evolutionary (Thompson, 1996). It is possible to interpret the sequence of elements that comprise the (three selected) strategic management models as being arranged to understand the strategic situation, choosing suitable strategies, and making the chosen strategies happen. The strategic management process can thus be claimed to consist of three stages: awareness, strategy formulation, and strategy implementation. Awareness In order to formulate effective strategies, strategists need to diagnose the ﬁrms internal strengths and weaknesses and the opportunities and threats of the ﬁrm. So strategists employ different techniques such as SWOT analysis to analyse the internal factors such as culture, structure, resources, leadership style and external factors of the ﬁrm such as economical and social factors, technology, and competitors (Zajac, 1995).

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Strategy Formulation in Entrepreneurial Firms

Strategy Formulation Strategy formulation includes developing a business mission, deciding both short term and long term objectives, and prioritizing strategies to pursue. Strategy formulation is concerned with resource allocation, decisions about diversiﬁcations, entry into international markets, merging with suppliers or sale agencies, and participation in joint ventures. Strategy commits an organization to speciﬁc products, markets and technologies over an extended period of time. They determine long term competitive advantages. Top managers bear responsibility for the ramiﬁcation of strategic formulation decisions: this reﬂects their authority to commit company resources for implementation of strategy (Rumelt, 1991; Analoui and Karami, 2003). Strategy Implementation Strategy implementation seeks to create the right circumstances within organizations so that formulated strategies can be executed. Implementation of strategy is achieved by developing a strategy-supportive culture, creating an effective organizational structure, and motivating individuals to learn new ways of contributing to improved performance. Often considered to be the most difﬁcult stage in strategic management, strategy implementation requires personal discipline, commitment and sacriﬁce. Successful strategy implementation relies on managerial ability to lead employees, assist redesign of products, improve organizational process, and adjust to environmental constraints (Ansoff and McDonnell, 1990). Evaluation Strategy evaluation culminates the activity inherent in the design, application and eventual assessment of strategy. Strategy evaluation is needed because current success does not guarantee that such success will continue in the future: an organization which becomes complacent loses the drive required for survival in an increasingly competitive environment. Essential to realistic evaluation of company performance is the development of performance indicators linked to key improvement factors and attributes that inﬂuence improvement of people, product, and process elements of organizational performance. Strategic evaluation begins by noting external and internal circumstances, continues by measuring performance, and ends by critical assessment of achievement against strategic objectives (Hill and Jones, 1995; Wheelen and Hunger, 1998). Environmental analysis, strategy formulation, strategy implementation and evaluation activities occur at three managerial levels in a large organization: corporate, Strategic Business Unit (SBU), and functional levels. By fostering effective communications and interaction among managers and employees across hierarchical levels, strategic management helps a ﬁrm to function by virtue of team structure that links corporate, SBU, and functional levels of the strategically-driven organisation. Most small business do not have divisions or business units.

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What is Entrepreneurship? Among the many engaged in entrepreneurship area, Stevenson (1983) deﬁned entrepreneurship as the pursuit of opportunity beyond the tangible resources that you currently control. With this deﬁnition, emphasis is placed upon how opportunity can be recognized, the process of committing to an opportunity, gaining control over the resources, managing the network of resources that may or may not be within a single hierarchy, and the way in which participants are rewarded (Stevenson, 1985; Stevenson and Jarillo, 1991). The entrepreneurial organization focuses on opportunity, not resources. Entrepreneurs must commit quickly, but tentatively, to be able to readjust as new information arises. The process of commitment becomes multi-staged, limiting the commitment of resources at each stage to an amount sufﬁcient to generate new information and success before more resources are sought. The entrepreneurial organization uses the resources that lie within the hierarchical control of others and, therefore, must manage the network as well as the hierarchy. Approaches to Entrepreneurship Many different and useful approaches have been used to describe and to analyse entrepreneurship. Austin et all (2006) argued that perspectives on entrepreneurship have tended to fall within three main streams of research, which include a focus on: • • •

The results of entrepreneurship: this stream is the domain of economists and explains the effects of entrepreneurship on the economic system. The causes of entrepreneurship: this stream explains why entrepreneurs act. This stream is the domain of sociologists and psychologists. The entrepreneurial management: this stream is the domain of management theorists. It discusses how entrepreneurs act and behave.

In the ﬁrst stream of research, economists have explored the impacts and results of entrepreneurship. One of the early studies in entrepreneurship (Schumpeter, 1934) examined entrepreneurship as a key process through which the economy as a whole is advanced. The impact of entrepreneurship on the economic system is an important issue in economics which is neglected. Perhaps the reason for this is that entrepreneurship is not readily compatible with the equilibrium framework that has come to dominate the ﬁeld of economics (Birkinshaw, 2000). The importance of entrepreneurship on economics has been investigated from different perspectives. For example, Dean and McMullen (2007) in their study investigated how entrepreneurship can help resolve the environmental problems of global socio-economic systems. They argued that environmental economists conclude that, environmental degradation results from the failure of markets, whereas the entrepreneurship literature argues that opportunities are inherent in market failure. As Dean and McMullen (2007) discussed, a synthesis of this literatures suggests that environmentally relevant market failures represent opportunities for achieving proﬁtability while simultaneously reducing environmentally degrading economic

18

Strategy Formulation in Entrepreneurial Firms

behaviours. It also implies conceptualizations of sustainable and environmental entrepreneurship which detail how entrepreneurs seize the opportunities that are inherent in environmentally relevant market failures. The second stream of research has focused on the entrepreneurs themselves. Research in this stream examines entrepreneurship from a psychological and sociological perspective (McClelland, 1961; Collins and Moore, 1964). For example, Harada (2004) studied the relationship between entrepreneurs’ characteristics and ﬁrm performance. Harada (2004) estimated the production function of new Japanese ﬁrms and examined whether the total factor productivity is affected by the human capital and gender of entrepreneurs. Empirical results show decreasing returns to scale of production, which veriﬁes the assumption of production functions in many previous studies on entrepreneurship. The ﬁndings of this research have also illustrated that the entrepreneur’s age has a signiﬁcantly negative effect on productivity, and the negative effect increases after 60 years of age. Although related business experience before start-up has a signiﬁcantly positive effect, the magnitude is limited and cannot overcome the negative effect of age. In another study Serarols-Tarres et al. (2006) investigated the inﬂuence of entrepreneur characteristics on the success of pure dot. com ﬁrms. They argued that cyber-traders companies known as dot.com ﬁrms, are playing an increasingly signiﬁcant role on the Internet, although the majority have not yet achieved much success. Despite this, there have been few studies focusing on the factors that affect the success of these companies. Serarols-Tarres et al. (2006) attempted to determine whether the characteristics of the entrepreneur may constitute a success’ factor for such ﬁrms, and if so, to what extent. They analysed 23 cases of Spanish dot.coms and a model to explain the inﬂuence of the entrepreneur characteristics on the success of pure dot.com ﬁrms was proposed. Finally, the third stream has focused on the entrepreneurial management process. This diverse literature includes research on how to foster innovation within established corporations (Gray and Mabey, 2005), start-ups and venture capital (Timmons and Bygrave, 1986), organizational life cycles (Quinn and Cameron, 1983), and predictors of entrepreneurial success (Dollinger, 1984). For example, Gray and Mabey (2005) investigated the role of leadership and management in boosting efﬁciency, productivity and innovation in European entrepreneurial ﬁrms. They argued that small ﬁrm participation in formal management development has been signiﬁcantly lower than that of large organizations. The main contrasts in management development practices were partly due to size effects but also partly due to key differences in strategic approaches to management development. Clearly from these three streams of research, earlier conceptualizations of entrepreneurship have often focused on either the economic function of entrepreneurship or on the nature of the individual who is ‘the entrepreneur,’ whereas in recent years, signiﬁcant research has focused on the ‘how’ of entrepreneurship. Studying Strategy in Entrepreneurial SMEs As discussed in the previous section, small and medium-sized ﬁrms in the UK make a large contribution to the economics of the country (McKiernan and Morris, 1995;

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Webb and Pettigrew, 1999). Research reveals that small companies are responsible for a large proportion of innovations in products and services, job creation and employment (Wheelen and Hunger, 1998). Despite the overall successes of small businesses, however, every year a lot of small companies fail. The propensity for small business failure in the early years is well documented (Storey, 1994). However, as well as a high failure rate, it is further estimated that at a given point in time approximately 40 per cent of businesses are experiencing neither growth nor decline. A variety of reasons have been identiﬁed for the lack of growth in micro enterprises. For example, Curran (1996) identiﬁed that for many owner-managers, employment growth is not an objective for the business and Hakim (1989) suggested that the majority have no plans for growth. There are also numerous studies to explore gaps or market failures associated with lack of ﬁnance (Binks and Ennew, 1996; Devins, 1999). According to a new report by chartered accountants Kidsons Impey (see Anonymous, 1999), many of the UK’s small and medium-sized businesses (SMEs) are failing to plan strategically for the future. Its Facing the Future survey of fast growing business (turnover growth in excess of 10 per cent p.a. over three years) from a variety of industry sectors found that almost one-third (32 per cent) of respondents had no business plan at all. Statistics tell us that small to medium-sized enterprises (SMEs) fail at a staggering rate. These are hard statistics to digest, knowing that the SME sector employs millions of employees and contributes signiﬁcantly to the British economy. Indeed, a reduction in the failure rate of small businesses would lead to tremendous economic beneﬁts. It is estimated that, there were approximately 3.7 million active businesses in the UK at the start of 2000. Of the entire population of 3.7 million enterprises only 7,000 were large (for details see Small Business Services, 2000). More than 1 million of these are statistically destined to fail, just imagine the impact of saving a reasonable percentage of them. Consider also the impact if a larger percentage of SMEs were not only able to survive, but grow to be competitive players in the global marketplace. There are many reasons for the failure rate of start-up businesses, including lack of adequate working capital, poor market selection, and rapidly changing external market conditions. However, the most signiﬁcant reason for this high failure rate is the inability of SMEs to make adequate use of essential business and management practices. Many small ﬁrms fail to develop an initial business plan, and those that do establish a business plan fail to continually adjust and use it as a benchmarking tool (Robinson, 1982; Hitt, Gimeno and Hosskisson, 1998). This apparent lack of concern over the importance of business plans was further underlined. The underlying problem appears to be an overall lack of strategic approach, beginning with an inability to plan a strategy to reach the customer and ending with a failure to develop a system of controls and evaluation to keep track of performance. Previous researches in the ﬁeld of strategic management in small businesses, suggest several issues of signiﬁcance that merit further investigations. For instance there are various arguments as to which type of strategy is the more effective for SMEs, should strategy be formal and written or informal? What is the association between strategic planning and performance in small businesses? The overall aim of this research is to explore senior managers’ perception and attitudes, and contribution

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to the strategic management process in British small and medium sized enterprises in the electrical and electronic industry. This study therefore sought to answer the following questions in an attempt to highlight important considerations for managers of small and medium-sized ﬁrms. •

•

•

What are the senior managers’ perceptions and attitudes to the strategic management process including: environmental scanning, strategy formulation, implementation and evaluation of strategy in small and medium sized enterprises. Which factors are associated with the effective strategy formulation and implementation process in small and medium sized enterprises and what is their impact on ﬁrm performance? What are the characteristics of a dynamic strategic management model in SMEs as an extension to the basic strategic management model, to assist decision making of the stages of formulation, implementation, and evaluation of strategy?

The Rationale for Studying Strategy and Entrepreneurship While the volume of literature on strategic management in large organizations is extensive (Stacy, 1993; Pearce and Robinson, 1994; Collin, 1995; Hitt, Gimeno and Hosskisson, 1998; Wheelen and Hunger, 1998; Hoskisson, 2000), the literature on small and medium sized enterprises strategic management is more limited (McKiernan and Morris, 1995; Berry, 1998; Smith, 1998; O’Gorman and Doran, 1999; Chan and Foster, 2001; and Beal, 2000). Strategic management as a ﬁeld of study typically deals with large, established business corporations, however, SMEs cannot be ignored. In the UK, small and medium sized enterprises (SME) have been deﬁned as one ﬁrm that employs up to 250 people and has up to £50 million turnover (Amboise and Muldowney, 1988; Berry, 1998; and Beal, 2000). Some writers have argued forcefully that formal strategic management procedures are particularly inappropriate for small and medium-sized ﬁrms, which have neither the management nor ﬁnancial resources to indulge in elaborate strategic management techniques (Cragg and King, 1988; Shrader et al., 1989; Watts and Ormsby, 1990). Also for companies operating within the turbulent environment of high technology industries where conditions changes so fast that environmental forecasting becomes meaningless and long range planning of questionable value (Smith and Fleck, 1987; Shrader et al., 1989). A number of studies have concluded that there is little or no signiﬁcant relationship between strategic planning and the performance of small ﬁrms (Unni, 1981; Robinson and Pearce, 1984; Shrader et al., 1989; Watts and Ormsby, 1990). These studies report mixed planning/performance relations, and most suggest that the value of planning is mitigated by factors such as environmental uncertainty, managerial expertise, and stage of ﬁrm development. This study explores the application of strategic management in small and medium sized enterprises in the UK. The electronic industry has been selected as the main focus in the SME sector. The rational for that is the signiﬁcant role of the SMEs

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in the UK economy and the dynamic nature of the electronic industry. Small and medium-sized enterprises are key drivers of economic growth and job creation in the UK (Bryson et all, 1992; McKiernan and Morris, 1995; Webb and Pettigrew, 1999). The shift to a knowledge-based, global economy is opening up new opportunities and challenges for these small businesses. Generally speaking, it could be conclude that, small businesses are the backbone of the economy (for example Schwenk and Shrader, 1993) accounting for more than half of total employment and over 80 per cent of employment growth in the past decade (Wheelen and Hunger, 1989). Small ﬁrms in the electronic industry are also often innovative and challenging to manage strategically (Bracker et al., 1988). Consequently, it is important to assess the value of approaches like strategic management for improving the performance of these ﬁrms. Integration of Strategic and Entrepreneurial Thinking While the ﬁelds of strategic management and small businesses, have developed largely independently of each other, they both are focused on how ﬁrms adapt to environmental change and exploit opportunities created by uncertainties and discontinuities in the creation of wealth (Hitt and Ireland, 2000; Venkataraman and Sarasvathy, 2001). As such, several scholars have recently called for the integration of strategic and entrepreneurial thinking (for example McGrath and MacMillan, 2000). Accordingly, Meyer and Heppard (2000) argue that the two are really inseparable. McGrath and MacMillan (2000) argue that strategists must exploit an entrepreneurial mindset and, thus, have no choice but to embrace it in order to sense opportunities, mobilize resources, and act to exploit opportunities, especially under highly uncertain conditions. Venkataraman and Sarasvathy (2001) use a metaphor based on Shakespeare’s Romeo and Juliet. They suggest that strategic management research that does not integrate an entrepreneurial perspective is like the balcony without Romeo. Alternatively, they argue that entrepreneurship research without integration of a strategic perspective is like Romeo without a balcony. In the 1990s, the small business became one of the mainstays of the economy (Webb and Pettigrew, 1999). One of the reasons for this can be attributed to an increasing number of employees, who, because of being laid off by the larger corporations in the 1980s and early 1990s, had joined the small business workforce. Second, has been the trend in large ﬁrms to outsource some of their activities to smaller ﬁrms, facilitated, to some extent, by the growth of the Internet. Third, the relative stability of the economy since the early 1990s has encouraged entrepreneurial activity. Fourth, the emergence of new economies around the world has accelerated global development, and this has also encouraged entrepreneurial activity in the UK. Small businesses will, therefore, continue to play a major role in both job creation and economic growth in the next decade. Recognizing the importance of small businesses as major contributors to job creation and economic growth, especially during the past decade, academic research on small business management practice has grown dramatically in the recent past. In particular, topics involving the strategic

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growth of small businesses have received much attention from researchers (for example see Krishnan, 2001). The total numbers of SMEs make them an important constituent of local, regional and national economics and subsequently a potential target for policy intervention. According to the Ofﬁcial UK Labour Market Statistics (1998) small businesses account for 84 per cent of all business units of UK. Business support policy interventions have shifted from a focus on job creation through business start-ups in the 1980s towards increasing the competitiveness of existing businesses with a view to their growth and development in the 1990s. The recent Competitiveness DTI, White Paper (1998) with its focus on the provision of advice to at least 10,000 startups a year by the year 2001, suggest once again, an increased emphasis on business formation. The importance of SMEs to the economy depends on the abilities of SMEs to fulﬁl these roles. Economic strategies to support SMEs will focus on the factors that encourage their growth or inhibit their growth. Company strategies for SMEs to grow and be successful will be based upon a technological or commercial innovation, or on a focused niche strategy with a differentiated product or services. Evan with these strategies any growing company will face severe problems as it proceeds through the different phases of its life cycle (Hitt and Ireland, 2000; Venkataraman and Sarasvathy, 2001). Structure of the Book The book is organized into seven separate but interlinked chapters. Chapter 1 introduces the objectives and scope of the study. This chapter provides an overview of the major works in the areas of strategy and management. It also provides a brief description of the key concepts of strategy and entrepreneurship. Chapter 2 reviews the existing theories of strategy formulation in entrepreneurial small and medium sized enterprises. The theories differ greatly in their scope and purpose, and inevitably both have been the subjects of, at times, ﬁerce academic debate that is outlined in the chapter. Chapter 3 provides a conceptual framework of the research. Accordingly, this chapter describes how the research design was developed and in doing so draws together all of the proceeding chapters. The chapter begins by outlining the research questions through the development of the framework and the resulting hypothesis about the process of strategic management in SMEs. Chapter 4 introduces the major ﬁndings of the research in connection with research propositions and hypotheses. The hypotheses offered by the conceptual framework of the research is compared with the ﬁndings of the study providing an interesting insight into the phases of the process of strategy formulation in entrepreneurial small and medium sized enterprises. Chapter 5 discusses strategic entrepreneurship and the role of entrepreneurs in the strategy formulation process in SMEs. It starts with a discussion about exploring and examining the entrepreneurs’ perception of the importance of the strategic management process in the studied ﬁrms. It explores the role of senior managers in

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the strategic management processes within small and medium enterprises in the next section of the chapter. Chapter 6 continues with a discussion about the ﬁndings of the research into the existence and nature of environmental analysis in developing business strategies in the studied ﬁrms. Finally, the chapter discusses the ﬁndings on factors associated with effective strategy formulation and implementation process in SMEs. Finally, Chapter 7 concludes the volume and as such is primarily concerned with the signiﬁcance of the ﬁndings of the research and its implications for the future development of the subject. The chapter begins by revisiting the aims of the research and the research questions. Then considers each of the research propositions and hypotheses. The chapter aims to explain the ﬁnal lessons; the theoretical and practical contributions as well as the implications for research in a wider context. References Amboise, G. and Muldowney, M. (1988), ‘Management Theory for Small Business: Attempts and Requirements’, Academy of Management Review, 13(2), 226−240. Analoui, F. (2000), ‘What Motivates Senior Managers?’ ‘The Case of Romania’, Journal of Managerial Psychology, 15(4), 324−326. Analoui, F. and Karami, A. (2003), Strategic Management in Small and Medium Enterprises (London: Thomson Learning). Andrews, K. (1986) The Concept of Corporate Strategy, (Homewood, IL: Irwin). Ansoff, H.I. and McDonnell, I. (1990), Implanting Strategic Management (Englewood Cliffs, N.J.: Prentice Hall). Ansoff, H.I. (1965), Corporate Strategy (New York: McGraw-Hill). Apfelthaler, G. (2000) Why Small Enterprises Invest Abroad: The Case of Four Austalian Firms with U.S. Operations, Journal of Small Business Management, 38 (3), 92–99. Bain, J.S. (1968), Industrial Organizations, 2nd edn (New York: Wiley Books). Beal, R.M. (2000), ‘Competing Effectively: Environmental Scanning, Competitive Strategy, and Organisational Performance in Small Manufacturing Firms’, Journal of Small Business Management, 38(1), 27−47. Berry, M. (1998), ‘Strategic Planning in Small High-Tech Companies’, Long Range Planning, 31(3), 455−466. Binks, M. and Ennew, C. (1996), Financing Small Firms in Small Business and Entrepreneurship, 2nd edn (London: Macmillan Business Books). Birkinshaw, J. (2000), Entrepreneurship in the Global Firm (London: Sage Publications). Bowman, C. (1998), Strategy in Practice (London: Prentice-Hall Inc.). Bowman, C. and Faulkner, D. (1997), Competitive Corporate Strategy (London: Irwin). Bowman, C. and Kakabadse, A. (1997), ‘Top Management Ownership of the Strategy Problem’, Long Range Planning, 30(2), 197−208.

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Kakabadse, A., Kakabadse, N. and Myers, A. (1996), ‘Leadership and the Public Sector: An Internationally Comparative Benchmarking Analysis’, Public Administration and Development, 16(4), 377−396. Koontz, H. and Weihrich, H. (1990), Essential of Management, 5th edn (Columbus, OH:McGraw-Hill/Book Co.). Krishnan, H.A. (2001), ‘Supplier Selection Practices Among Small Firms in the United States: Testing Three Models’, Journal of Small Business Management, 39(3), 259−271. Leavy, B. (1996), Key Process in Strategy (London: International Thomson Business Press Books). Luffman, G., Sanderson, S., Lea, E. and Kenny, B. (1991), Business Policy: An Analytical Introduction, 2nd edn (Oxford: Blackwell Business Publication). Luttwak, E. (1987), Strategy the Logic of War and Peace (Belknap: USA Harvard). Marsh, I. (1999), ‘Program Strategy and Coalition Building as Facets of New Public Management’, Australian Journal of Public Administration, 58(4), 54−68. Mason, E.S. (1939), ‘Price and Production Policies of Large Scale Enterprises’, American Economic Review, 29, 61−74. McClelland, D.C. (1961), The Achieving Story (Princeton, NJ: D. Van Nostrand Books). McGrath, R.G. and MacMillan, I. (2000), The Entrepreneurial Mindset (Boston, Mass.: Harvard Business School Publishing). McKenna, S.D. (1996, November), ‘The Darker Side of the Entrepreneur’, Leadership and Organizational Development Journal, 17(5), 41. McKiernan, P. and Morris, C. (1995), ‘Strategic Planning and Financial Performance in UK SMEs: Does Formality Matter?’ British Journal of Management, 5, 31−41. Meyer, G.D. and Heppard, K.A. (2000), Entrepreneurship as Strategy: Competing on the Entrepreneurial Edge (Thousand Oaks, Calif.: Sage). Miller, D. and Toulouse, J.M. (1986), ‘Strategy, Structure, CEO Personality and Performance in Small Firms’, American Journal of Small Businesses, Winter, 47−62. Mintzberg, H. (1978), ‘Patterns in Strategy Formations’, Management Science, 24(9), 934−948. Mintzberg, H. (1994), The Rise and Fall of Strategic Planning (London: PrenticeHall). Mintzberg, H. and Quinn, J.B. (1998), Reading in the Strategy Process, 3rd edn (New Jersey: Prentice-Hall Books, Inc.). Mintzberg, H., Quinn, J.B. and Ghoshal, S. (1995), The Strategy Process, (European Edition, New Jersey: Prentice Hall International (UK) Ltd). O’Gorman, C. and Doran, R. (1999), ‘Mission Statements in Small and Medium Sized Businesses’, Journal of Small Business Management, 37(4), 59−66. Ofﬁcial UK Labour Market Statistics (1998) Annual Employment Survey, http:// www.nomisweb.co.uk/news/april01.html#ABI. Ohmae, K. (1983), ‘The Mind of the Strategist’, Harmondsworth: Penguin Books. Pearce II, J.A. and Robinson, JR. R.B. (1991) (1991), Formulation, Implementation, and Control of Competitive Strategy, 4th edn (Boston: Irwin).

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Pearce, J. and Robinson, R. (1994), Strategic Management: Strategy Formulation and Implementation, 5th edn (Boston, Mass.: Irwin). Pfeffer, J. (1995), ‘Producing Sustainable Competitive Advantage Through the Effective Management of People’, Academy of Management Executive, 9(1), 55−72. Pitts, R.A. and Lei, D. (1996), Strategic Management Building and Sustaining Competitive Advantage (New York, NY: West Publishing Company). Porter, M. (1979), ‘How Competitive Forces Shape Strategy’, Harvard Business Review, March/April. Porter, M. (1980), Competitive Strategy (New York: Free Press). Porter, M. (1985), Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press). Porter, M. (1998), On Competition (Boston: Harvard Business School Presses). Quinn, R.E. and Cameron, K. (1983), ‘Organizational Life Cycles and Shifting Criteria of Effectiveness’, Management Science, 29, 33–51. Robinson, R.B. (1982), ‘The Importance of Outsiders in Small Firm Strategic Planning’, Academy of Management Journal, 25(1), 80−93. Robinson, R.B. and Pearce, J.A. (2001), ‘Why Small Businesses Need a Strategic Plan?’ Business and Economic Review, 48(1), 12−15. Robinson, R.B., Pearce, J.A., II (1984), ‘Research Thrusts in Small Firm Strategic Planning’, Academy of Management Review, 9(1), 128−137. Robinson, R.B., Pearce, J.A., Vozikis, G. and Mescon, T. (1984), ‘The Relationship Between Stage of Development and Small Firm Planning and Performance’, Journal of Small Business Management, 22(2), 45−52. Rumelt, R.P. (1991), ‘How much Does Industry Matter?’ Strategic Management Journal, March, 167−185. Schendel, D.E. and Cool, K.O. (1988), Development of the Strategic Management Field, in Strategic Management Frontiers, ed, J. H. Grant, (Greenwich, CT: JAI Presses), 17–31. Schumpeter, J.A. (1934), The Theory of Economic Development (Cambridge, Mass.: Harvard University Press). Schwenk, C.R. and Shrader, C.R. (1993), ‘Effects of Formal Strategic Planning on Financial Performance in Small Firms: A Meta-Analysis’, Entrepreneurship: Theory and Practice, 17(3), 53−72. Scott, M. and Bruce, R. (1987), ‘Five Stages of Growth in Small Businesses’, Long Range Planning, 20(3), 45−52. Segal-Horn, S. (1998), The Strategy Reader (Oxford: The Open University, Blackwell Publishers Ltd.). Serarols-Tarres, C., Padilla-Melendez, A. and del Aguila-Obra, A.R. (2006), ‘The Inﬂuence of Entrepreneur Characteristics on the Success of Pure Dot.Com Firms’, International Journal of Technology Management, 33(4), 373−388. Shay, J.P. and Rothaermel, F.T. (1999), ‘Dynamic Competitive Strategy: Toward a Multi-Perspective Conceptual Framework’, Long Range Planning, 32(6), 559−572.

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Chapter 2

Strategy Formulation in Small and Medium-Sized Enterprises Introduction A wide range of conceptual frameworks exists for strategy formulation in small and medium-sized enterprises (SMEs). Early scholars (Chandler, 1962; Ansoff, 1965; Andrews, 1971) in the ﬁeld of strategy regarded strategy as a rational decisionmaking process by which the organization’s resources are matched with opportunities arising from the competitive environment. Others have stated that, environment has a strong deterministic inﬂuence on the strategy making process in organizations (Porter, 1980; Bourgeois and Brodwin, 1984; Flood et al., 2000). In contrast, the proponents of the resource-based view, however, argue that, it is not the environment but the resources of the organization, which should be considered as the foundation of the strategy (Grant, 1991; Boxall and Steeneveld, 1999). Despite the apparent differences, these approaches to strategy have one thing in common; they all aim at maximizing performance by improving one organization’s position in relation to other organizations in the same competitive environment. That is, how the organization is differentiated from its competitors. The existing presence of a wide range of approaches towards strategy reﬂects the different views taken in researching the subject and its evolution over time. This chapter aims to provide the reader with a comprehensive overview of the major works in the ﬁeld of strategy formulation with particular concern for small and medium sized entrepreneurial ﬁrms. Theoretical Background of Strategy in Entrepreneurial SMEs Much has been written in recent years about the importance of strategic management in entrepreneurial small and medium enterprises. The success and rapid growth of many medium and small sized businesses have been largely attributed to their strategic planning capabilities. While some prominent writers have concentrated on exploring strategic planning theory and developing a conceptual framework upon which a discipline could be based, others have chosen to study company planning practices and the way in which management could more effectively apply strategic planning theory. Though interest in small business management has sharply increased and indeed the literature available on strategic management in small businesses has grown over the past two decades, much of it remains conceptual in approach. The few empirical studies that do exist have been criticized on the grounds that they lack academic

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rigour and do not illuminate the perceived relationship between formal strategic management processes and organizational performance (Shrader et al., 1989). Rational Model of Strategy Traditional thinking on strategy tends to deﬁne it in terms of planning to arrive at the optimum strategy for a given context. Plans are naturally based on a linear model of decision-making (Chaffee, 1985), and the planning process is divided into two main stages: strategy formulation and implementation (Ansoff, 1965). The formulation of strategy is seen as the prerogative of top management (Chaffee, 1985) and more importantly it is seen as a rational exercise, involving the objective analysis of company resources and the external environment in which the company operates. The planning model, therefore, focuses on the links between the organization and its external environment. Consequently, a myriad of sophisticated techniques have been developed to aid managerial decision-making. These included portfolio analysis (The Boston Consulting Group), the General Electric market attractivenessbusiness position matrix, Porter’s model of industry attractiveness (Porter, 1980) and the product life cycle theory. Great faith is placed on the gathering of ‘hard’ factual information for planning and control purposes. The planning model is adaptive in the sense that it suggests that the organization has to continually strive to keep up with an environment that moves ahead of it (Hamel, 1996). Other writers have presented the planning in the context of ‘voluntarism’, thus giving the impression of well-informed leaders choosing between clearly articulated alternatives. According to Hanlon and Scott (1995), the dominant perspective in relation to strategy in smaller organizations has been the rational planning model. Planning is often seen as the key to a company’s success (Leidecker and Bruno, 1986; Monck et al., 1988), since it reduces uncertainty, it ensures that alternatives are considered and assists managers in dealing with investors (O’Gorman and Cunningham, 1997). Other researchers focus on planning as being contingent upon the nature of the business itself (Monck et al., 1988; Berry, 1998), which includes the skills of the owner-managers and their predisposition to planning, company size and stage of development/life cycle (Robinson and Pearce, 1984; Scott and Bruce, 1987). A survey of 257 companies found that small high-tech ﬁrms do use strategic planning to direct their long-term growth, bearing in mind that the planning processes become more sophisticated as ﬁrms grow (Berry, 1998). The value and applicability of strategic planning for the small ﬁrm has been questioned by some who argue that, for example, a lack of ﬁnancial resources and constraints on management time are seen as obstacles to strategic planning (Bhide, 1994). It has been argued that strategic planning loses its meaning in a dynamic environment, where innovation, ﬂexibility and responsiveness to perishable opportunities are key conditions for survival (Mintzberg, 1979). At the other extreme, writers like Carson and Cromie (1989) argue that most entrepreneurs use neither formal planning nor strategy. Thompson (1999) suggests that entrepreneurs require the ability to think and act strategically. While the majority of researchers share the

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view that formal planning is a necessity, they also acknowledge that planning in small ﬁrms tends to be different from that of large corporations (Carson and Cromie, 1989). Within the rational planning school of thought, attempts have been made to identify the types of strategy associated with high growth SMEs (Covin, 1991; Smallbone, Leig and North, 1995). On the whole, the niche strategy (Miles and Snow, 1978) is seen as the accepted norm since it enables entrepreneurs to conserve resources and avoid direct confrontation with large ﬁrms. Managers have been advised to pay special attention to the development of new products and markets (Smallbone, Leig and North, 1995), to compete on the basis of product differentiation, innovation, high product quality, and to exploit the unique strengths of the small ﬁrm (Murray and O’Gorman, 1994). It is therefore proposed that making the correct strategic choices at start-up is crucial since investments made in people, technology and ﬁxed assets cannot be easily altered. Indeed, the links between the environment, strategy and performance have been explored (Covin and Slevin, 1990). Sandberg and Hofer (1987) nevertheless concluded that small ﬁrms should enter industries in the growth stage, or industries characterized by heterogeneous demand, supply shortages or evident disequilibria. Studies in the planning school of thought, while valuable, tend to embody an explicit, normative model of the strategy process. Hence, strategy formulation is assumed to be driven by the owner-manager. Intuitive Learning Model of Strategy Probably, McCarty and Leavy’s recent work (2000) is the best example of work in the debate concerning the intuitive learning model of strategy. They provide a comparison between the rational planning and intuitive learning models of strategy (see Table 2.1). Over the years, several writers have taken the debate well beyond the normative, rational planning models that have dominated the strategic management ﬁeld for so long. Distinguished writers such as Mintzberg (1987) and Mintzberg and Waters (1982), see strategy not so much as the outcome of point-in-time planning exercises but more as a pattern in a stream of decisions made over time. Indeed, Mintzberg coined the term ‘strategy formation’ to highlight the empirical reality that strategies emerge over time and are often not realized as intended. Process theorists (Pettigrew and Whipp, 1991) have argued that a clear distinction between strategy formulation and implementation does not really exist. They have highlighted the non-linear nature of the strategy process. Thus, powerful political and cultural forces in large organizations tend to result in the convergence of planning and execution (Pettigrew, 1987; Johnson, 1992; Pfeffer, 1994). In this way strategies often reﬂect what will work in practice as much as what should be done (Quinn, 1980; Mintzberg, 1987). Quinn (1980) argues that the development of strategies is a process of ‘logical incrementalism’ where managers implement strategies in a purposeful but gradual manner in order to minimize risk, hence remaining opportunistic, experiment and learn, and fashion a broad consensus for change. A study of Irish ﬁrms by Leavy and

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Table 2.1

The differences between rational and learning models for strategic planning

The Rational Planning Model

The Intuitive Learning Model

Organization is guided by a formal plan.

Organization is not guided solely by a formal strategy and strategy may be deliberate and/or emergent in nature.

Focus is on the external environment: characteristics of the industry and market.

Focus is on the internal dimension of the organization: policies, culture, learning, organizational history, leadership. Non-linear model of strategy formulation.

Linear model of strategy formulation.

Decision-making: hierarchical, topdown. Rational

Decision-making: top-down and bottom-up. Rational and emotional.

Adaptive

Inventive

Voluntaristic

Neither overly voluntaristic nor overly deterministic.

Adapted from McCarthy and Leavy, 2000.

Wilson (1994) illustrates the interplay between leadership the context (industry) and history in the shaping of strategic outcomes. They skilfully show how leaders might best be viewed as ‘tenants of time and context’. Inevitably, new leaders have to deal with the strategic legacy of their predecessors, and the previous predictably made decisions and the changing nature of the business environment, which all serves to constrain leadership capacity. As a result, strategy formation is a continuous, interactive and uncertain process. It is evident that process researchers are mainly concerned with exploring the relationship between internal processes and the degree of competitiveness (Leavy, 1996). The tacit assumption in this school of thought is that strategies are not the outcome of a highly analytical and rational process. Instead, strategists need to capture ‘soft’ data such as feeling, intuition, vision, learning and judgement as well as ‘hard’ data (Mintzberg, 1979; Quinn, 1980; Mintzberg, 1994). Several writers see the environment not as a neatly packaged, objective reality ‘out there’ but as an enacted and interpreted environment (Smircich and Stubbart, 1985; Isabella, 1990). Psychologists illustrate that managers construct simpliﬁed mental models in dealing with complex problems. Without these simpliﬁcations, managers would become paralysed by the need to analyse extensive data. The process model of

Strategy Formulation in Small and Medium-Sized Enterprises

35

strategy also stresses invention as well as adaptation. For example, Hamel (1996) describes strategy as a prelude to ‘revolution’ where managers can ‘enact’ or ‘create’ their own environment and challenge industry conventions. While the planning model is primarily voluntarist in nature, the researchers on strategy process tend to adopt an intermediate world view, by being sensitive to how contextual forces can both enable and constrain leadership capacity (Leavy, 1996). Several writers have focused on the internal dimensions of the ﬁrm (Hanlon and Scott, 1995; Meyer and Heppard, 2000). A study by Hanlon and Scott (1995) found that entrepreneurs were able to persuade others to ‘buy into’ their dream or vision that they believe shapes the development of the ﬁrm. Another study by Bouwen and Steyaert (1990), located in the resource-based school of thought, found that the values and core competencies of the ﬁrm tend to change in the growth phase. Not surprisingly, research in the small ﬁrm literature focuses on the personal characteristics of the founder; the entrepreneur is seen to have a crucial impact on company strategy, culture and performance (Kets De Vries, 1996). For example, it is argued that entrepreneurs are rarely strategists acting according to rational principles (Kets De Vries, 1996). Instead they are more likely to act on the basis of instinct, a master plan or vision, and impulse. Thompson (1999), however, believes that entrepreneurs possess the qualities of successful strategic leaders; they have to assess opportunities and threats in the environment and adopt strategic positions. Several writers have called for further research on how strategies actually form in small ﬁrms (Hanlon and Scott, 1995; Hendry, Arthur and Jones, 1995; Boussouara and Deakins, 1999). For instance, Boussouara and Deakins (1999, 207) argue that, in the high technology arena, the formulation of marketing strategies and the learning process are not very well understood. In recent years, the organizational learning concept has emerged as a strong theme in the strategy in small ﬁrm literature (Hendry, Arthur and Jones, 1995; Boussouara and Deakins, 1999; Chaston, Berger and Sadler-Smith, 1999). It is often assumed that learning, which underpins diverse activities such as new product development, productivity, customer service and management styles is associated with ﬁrm performance. However, not all studies provide clear statistically signiﬁcant relationships between learning and performance (Chaston, Berger and Sadler-Smith, 1999). Organizational learning is often stimulated by crisis, although it has negative connotations for managers (Hendry, Arthur and Jones, 1995). In summary, the treatment of strategy in the small business literature has lagged behind that of the mainstream strategic management. Most studies are deemed to be normative in orientation and thus ﬁrmly located in the rational-planning school of thought. Recent studies suggest that an optimal strategy for all ﬁrms in a given context does not exist. This is largely due to variations in learning, culture, personalities, experiences and goals of the actors involved in the process within the ﬁrms. Conceptualization of Strategic Planning While the term ‘strategic planning’ is the cornerstone for an entire discipline, there is remarkably little consistency in its operationalization (Boyd and Reuning-Elliott,

36

Strategy Formulation in Entrepreneurial Firms

1998). The strategic planning construct has been used by researchers for over two decades, and is generally one element of a larger analysis or model. Consequently, the development of a common conceptualization and measurement scheme has received only sporadic attention (Boyd and Reuning-Elliott, 1998). The proposed table (see Table 2.2) is based on a review of selected works, published during the last decade, which have used the strategic planning construct. There appears to be ﬁve problems associated with prior use of this construct. First, inconsistent measurement schemes have been used to describe and operationalize strategic planning. Numerous labels have characterized planning, and inconsistencies are found both within and across labelling schemes, that is studies using the same labels frequently use different indicators, and the same indicators are also used to represent multiple labels. Second, while planning is most frequently conceptualized as one dimensional, it has also been conceptualized with two, three and even seven dimensions. Third, studies often collapse interval or ratio level indicators to nominal or ordinal categories. The consequences of this transformation from a ﬁner to cruder level of analysis include the loss of information and statistical power, and limiting the ability to effectively test hypotheses. Fourth, most of the prior studies do not report tests of the reliability or validity of their measures. The last concern with prior studies is parsimony. Since the willingness of executives to participate in a research is partially driven by survey length, a planning measure must balance precision vs. parsimony (Boyd and Reuning-Elliott, 1998) To sum up, prior approaches to measuring planning have used inconsistent terminology, and have numerous methodological limitations. An important criterion, that is the content validity, also requires that proposed measures be grounded in theory. As seen previously, numerous approaches at both conceptual and operational levels have been used to develop measures for strategic planning. Organizational environment, for example, has been variously characterized as objects, elements, attributes and perceptions. Consequently, the ﬁrst step in developing a model of strategic planning is to specify the underlying framework from which a measure can be operationalized. Researchers have typically developed indicators intended to reﬂect how closely a ﬁrm’s planning activities reﬂect those developed by normative strategy literature (Boyd and Reuning-Elliott, 1998). In most studies aspects of process, mission statements, trend analysis, long- and short-term goals, and organizational control systems have been selected to operationalize planning. While the choice of indicators has varied widely across studies, most studies seem to deﬁne planning as the formality of an importance associated with those indicators (Pearce and David, 1987). As a result, to be consistent with the prior studies Boyd and Reuning-Elliott (1998) in their study have, deﬁned strategic planning as a normative process. Strategy Formulation Phases in SMEs The results of the comparative analysis show that the strategy formation process displayed a marked phase pattern over time. In general, strategy formation in SMEs does not conform in any way to the rational planning model of strategy. Rather,

Table 2.2

Comparison analysis of the use of strategic planning construct

Author(s)

Focus

Planning deﬁnition

Level

Beal, 2000

Performance

Competitive strategy

Berry, 1998 O’Gorman and Cunningham, 1997 Priem et al (1995) Capon et al (1994) Veliyath and Shortell (1993)

Strategic Planning Mission Contingency Performance Generic strategies

Formality Formality Rationality Sophistication Characteristics

Ordinal/ Interval Ordinal Ordinal Interval Ordinal Interval

Powell (1992a)

Competitive advantages/ contingency Contingency Performance Generic strategies Decision Making Performance Contingency Performance Contingency Planning effectiveness

Goal setting, scanning and analysis Comprehensiveness Completeness and Areas Formality and innovativeness Formality Sophistication Analysis Sophistication Rationality Capabilities

Ramanujam and Venkatraman (1987) Bracker and Pearson (1986) Grinyer et al (1986)

Effectiveness Contingency

Systems Sophistication Factors

Ginter et al (1985) Acklesberg and Arlow (1985)

Descriptive Performance

Process Formality and analytical

Rhyne (1985)

Information use

Fredrickson and Mitchell(1984) Welch (1984) Javidan (1984) Robinson and Pearce (1983) Leontiades and Tezel (1980) Lindsay and Rue (1980)

Decision processes Performance Performance

Powell (1992b) Kukalis (1991) Shortell and Zajac (1990) Sinha (1990) Bracker et al (1988) Miller et al (1988) Odom and Boxx (1988) Miller (1987) Venkatraman and Ramanujam (1987)

Performance Performance

Indicators

Dimensionality tests None

Reliability/ validity Alpha

12 500 12

None None None None Factor

Alpha Alpha Alpha None Alpha

Interval

11

None

Alpha

Interval Ordinal Interval Interval Ordinal Interval Ordinal Interval Interval

11 19 6 2 8 5 6 12 12 34 8 19

Alpha Reliability None Validity Reliability Alpha None Alpha Reliability and validity Alpha None None

8 6

None Factor

None Alpha

Openness

Interval Ordinal Interval or ratio Interval Nominal/ interval Ordinal

None None Factor None None None None Factor Conﬁrmatory factor None None Factor

8

Factor

Alpha

Comprehensiveness Strategy Extensiveness Formality Importance Completeness

Interval Nominal Ordinal Ordinal Interval Ordinal

43 5 11 3 1 14

None None None None None None

None None None None Validity None

Strategy Formulation in Entrepreneurial Firms

38

the companies seemed to evolve from an early ﬂuid stage of strategy formation, referred to here as a quasi-strategic phase, to a stage where the enterprise becomes characterized by a more explicit and clearly deﬁned strategy (see Figure 2.1). The ﬁrst phase in the strategy formation process, as aptly illustrated by McCarthy and Leavy (2000), is characterized as a quasi-strategic phase, which is characterized by little planning formality, the pursuit of a multiplicity of goals, and a very individualistic management style with the founder’s views predominating. In general, the strategy formation process during the quasi-strategic phase is characterized by a short planning horizon and the absence of detailed goals; the planning process was informal in the sense that plans often resided in the minds of the founder and were communicated to others informally. None of the SMEs studied possessed a written strategy document. It is reported that all entrepreneurs stressed that getting the business off the ground in the early days was extremely difﬁcult. It is clear that business start-up was typically an unstructured, uncertain and highly stressful phase. Unlike leaders of established organizations who have to develop a strategy with reference to the past, entrepreneurs are in a position to be able to create their history. The founders’ style of management can be described as ‘individualistic’ in the sense that they have control over the venture, have a tendency to be self-reliant and are able to persuade people to share their belief in their vision on account of their strong personalities.

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! &+

"

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Figure 2.1

Three phases of strategy formulation in SMEs

Strategy Formulation in Small and Medium-Sized Enterprises

39

The second phase has been referred to as the deﬁning episode in the process of strategy formulation in SMEs. The term ‘deﬁning episode’ is used to describe a period of transition. This could be a ﬁnancial crisis or change in ownership, and in all cases it signiﬁes a major break from the past. The business start-up phase is typically characterized by vision, imagination, unproven ideas, experimentation and opportunism. However, the onset of crisis usually results in the emergence of a more cautious outlook and a strong desire to safeguard the organization. During the crisis, people are more inclined to turn to hard reason, to ask ‘why’, to remember past experience of crisis and seek some justiﬁcation for the proposed plans. The third phase in the process is the strategic one. This phase seems to be characterized by greater planning and control, particularly of the ﬁnancial side of the business. McCarthy and Levy report that in the company, long-term business strategies are put into place. Management moved from a service to more productled strategy and it became more budget-orientated and more cost conscious. In the aftermath of crisis, management began holding formal meetings to review past performance and began to forecast the future over a 3-year period. Two companies were taken over after a crisis episode. Entrepreneurs suffered some loss of credibility during periods of crisis and the crisis showed that the risk-taking role played by the founding entrepreneur was no longer appropriate. The strategic phase of the business seems to demand a change in management style on the part of the entrepreneur. Strategic Management Model for Entrepreneurial SMEs The process involved in a typical model of strategic management was introduced. It includes environmental scanning, strategy formulation, strategy implementation and evaluation of strategy. Wheelen and Hunger (1998) have argued that, the above process does not ﬁt small businesses and new entrepreneurial ventures. These companies must have a new mission, objectives, strategies, and policies out of a comparison of its external opportunities and threats to its potential strengths and weaknesses (see Figure 2.2).

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$ %! *%+

< $ < <

Figure 2.2

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$ + >@ !

Strategy development model for new ventures

40

Strategy Formulation in Entrepreneurial Firms

Consequently, they proposed a modiﬁed version of the strategic management model, which more closely suits the new entrepreneurial businesses and is composed of the following eight interrelated steps: 1. Develop the basic business idea, a product and/or service having target customers and/or markets. The idea can be developed from a person’s experiences or generated in a moment of creative insight. 2. Scan and assess the external environment, to locate factors in the societal and task environments that pose opportunities and threats. The scanning should focus particularly on market potential and resource accessibility. 3. Scan and assess the internal factors relevant to the new business. The entrepreneur should objectively consider personal assets, areas of expertise, abilities and experience, all in terms of organizational needs for the new venture. 4. Analyse the strategic factors in light of the current situation using SWOT. The venture’s potential strengths and weaknesses must be evaluated in light of opportunities and threats. 5. Decide go or no go. If the basic business idea appears to be a feasible business opportunity, the process should be continued. Otherwise further development of the idea should be cancelled unless the strategic factors change. 6. Generate a business plan specifying how the idea will be transformed into reality. 7. Implement the business plan through the use of action plans and procedures. 8. Evaluate the implemented business plan through comparison of actual performance against projected performance results. To the extent that actual results are less than or much greater than the anticipated results, the entrepreneur needs to reconsider the company’s current mission, objectives, strategies, policies and programmes, and possibly make changes to the original business plan. Environmental Scanning in SMEs The purpose of environmental scanning is to identify strategic factors − those external (Opportunities and Threats) and internal elements (Strengths and Weaknesses) that will determine the future of the ﬁrm. The simplest way to conduct environmental scanning is through SWOT analysis. SWOT is an acronym used to describe those particular strengths, weaknesses, opportunities, and threats that are strategic factors for a speciﬁc company. In understanding environmental scanning, strategic managers must ﬁrst be aware of the many variables within a corporation’s external environment namely societal and task strategic forces. The societal forces include general forces that do not directly touch on the short-run activities of the organization but can inﬂuence its long-run decisions. These include economic, technological, political and socio-cultural forces. While, the task forces includes those elements or groups that directly affect the corporation and in turn, are affected by it. These are governments, local communities, suppliers, competitors, customers, creditors,

Strategy Formulation in Small and Medium-Sized Enterprises

41

employees and trade associations. A corporation’s task environment is typically the industry within which that ﬁrm operates. In contrast, the internal environment of the ﬁrm consists of variables that are within the organization itself and are not usually within the short-run control of top management. They include the corporation’s structure, culture and resources. Key strengths form a set of core competencies, which the corporation can use for competitive advantage. Previous research has identiﬁed the presence of three or four scanning stages or levels of complexity depending on the type of ﬁrms and their stage of development. Fahey, Kling and Narayanan (1981) found three types of scanning: 1) ‘irregular scanning’ 2) ‘intermittent scanning’ (partial integration of activities with objectives); and 3) ‘continuous scanning’ (structured opportunity-seeking). After verifying their typology with a sample of professionals and managers, these last researchers observed that the most complex scanning systems fell into the intermittent category. Similarly Jain (1984) found that, scanning practices are developed in four distinct types or phases: 1. the ‘primitive phase’ (no speciﬁc effort); 2. the ‘situational phase’ (awareness of the need to scan but no formal system introduced, or sporadic scanning); 3. the ‘reactive phase’ (unplanned, unstructured activities); and 4. the ‘proactive phase’ (rigorous, intensive practices). Choo (1999), in his study contended that, environmental scanning includes both looking at information (viewing) and looking for information (searching). He offers four types of environmental scanning including: undirected viewing, conditioned viewing, informal search and formal search. In undirected viewing, the manager is exposed to information with no speciﬁc informational need in mind. The goal is to scan broadly in order to detect signals of forthcoming change early. Varied sources of information are used, and large amounts of information are screened. As a result, the individual becomes sensitive to selected areas or issues. In conditioned viewing, as opposed to undirected, the individual directs viewing to selected topics or to certain types of information. The goal is to evaluate the signiﬁcance of the information encountered in order to assess the general nature of the impact on the organization. The individual wishes to do this assessment in a costeffective manner, without having to dedicate substantial time and effort in a formal search. If the impact is assessed to be sufﬁciently signiﬁcant, the scanning mode changes from scanning to searching. During informal search, the individual actively looks for information to deepen the knowledge and understanding of a speciﬁc issue. It is informal in that it involves a relatively limited and unstructured effort. The goal is to gather information to elaborate an issue so as to determine whether there is a need for action by the organization. If a need for a decision or response is perceived, the individual dedicates more time and resources to the search. Finally, during formal search, the individual makes a deliberate or planned effort to obtain speciﬁc information or information about a speciﬁc issue. Search is formal

Strategy Formulation in Entrepreneurial Firms

42

because it is structured according to some pre-established procedure or methodology. The goal is to systematically retrieve information relevant to an issue in order to provide a basis for developing a decision or course of action. Formal searches could be a part of competitor intelligence gathering, patents searching, market analysis or issues of management, among other activities. Formal searches prefer information from sources that are perceived to be knowledgeable or from information services that make efforts to ensure data quality and accuracy. In order to be effective, environmental scanning needs to engage all four modes of viewing and searching. Undirected viewing helps the organization to scan broadly and develop peripheral vision so that it can see and think ‘outside the box’. Conditioned viewing tracks trends and gives the organization early warning about emerging issues. Informal search draws a proﬁle of an issue or development, allowing the organization to identify its main features and assess its potential impact. Formal search systematically gathers all relevant information about an issue to enable intelligent decision-making (Choo, 1999). One must also realize that SMEs do not necessarily evolve on a linear basis from stage to stage. Indeed, certain stages can be bypassed when a rapidly changing situation requires it. For instance, scanning can take on added importance and become more complex when the ﬁrm’s environment becomes more uncertain or hostile, particularly when strong threats emerge (Raymond, Julien and Ramangalahy, 2001). Other factors such as the type of competitive advantage to be obtained by a ﬁrm, its level of technological development, the quality and level of education of its leaders, and its active participation in information networks (Organisation for Economic Cooperation and Development [OECD], 1993) can differentiate the type or level of scanning done by SMEs. In other words, a ‘primitive’ or a ‘situational’ scanning system can be perfectly justiﬁed if the information obtained allows the small ﬁrm to maintain or increase its competitiveness in a speciﬁc economic environment. Recent studies have focused on environmental scanning as part of the planning processes in small and medium-sized enterprises (Larry, Fann and Nikolaisen, 1998). For instance, Larry, Fann and Nikolaisen (1998) conducted a study to investigate the environmental scanning practices and information sources of owner-managers of small ﬁrms not having planning departments. Using semi-structured interviews of 88 owner-managers in the USA, they found that, small businesses do analyse the environment prior to formulating their business strategies. They indicated that: • • •

•

most small business owner-managers who are responsible for both operational and strategic planning conduct environmental scanning regularly small business owners seek specialized information from magazines, while friends and family members act as personal advisers the owner-managers of the small businesses did not use or did not consider valuable the traditional sources of business information and advice for small businesses, such as accountants, bankers and lawyers owner managers perceived the business environment as stable.

Formal environmental scanning activity is emerging not only in large ﬁrms but also, as recently shown by Pollard and Hayne (1998), in SMEs. This includes SMEs’

Strategy Formulation in Small and Medium-Sized Enterprises

43

increasing use of computer-based systems (Raymond and Bergeron, 1997), even if their information and scanning practices vary depending upon the type of market and the level of competition. In a recent enquiry in the land transport equipment industry, a majority of small ﬁrms considered their environmental scanning system, be it formal or informal, to be relatively effective, even if only a minority had at least one employee to which scanning responsibilities were formally assigned (Raymond, Julien and Ramangalahy, 2001). And while some of these ﬁrms required outside help to increase their scanning effectiveness, they did so for complex matters such as developing strategic alliances or networks in responding to international competition. Nonetheless, most studies initially assume that SMEs tend to have little scanning activity (Raymond, Julien and Ramangalahy, 2001). Another assumption is that there is ‘one best way’ for these ﬁrms to scan their environment, using prescriptive models usually taken from large organizations. However, these assumptions are too simplistic given that we still know too little about how SMEs, and above all their owner-managers, gather, select, interpret and analyse external information in conceiving their strategies and developing their operations. For instance, although some studies have shown the informal character of environmental scanning in small ﬁrms, in many cases scanning is a mix of informal and formal processes, depending upon the type of information sought or the urgency of the need (Raymond and Bergeron, 1997; Analoui and Karami, 2003). Thomas, Clark and Gioia (1993) have found that, there is a positive relationship between environmental scanning and proﬁt. Choo (1999) argues that, environmental scanning is the acquisition and use of information about events, trends and relationships in an organization’s external environment, the knowledge of which would assist management in planning the organization’s future course of action. Most empirical research on environmental scanning has focused on relationships between scanning behaviours (frequency, scope, sources used and interest) and environmental conditions such as environmental uncertainty, perceived threats and perceived opportunities (Sawyer, 1993; Lang, Calatone and Gudmundson, 1997). For instance Jennings and Lumpkin (1992) found support for their hypotheses that 1) ﬁrms following a differentiation strategy scanned their environments in search of opportunities; and 2) ﬁrms following a low cost strategy looked for threats to their survival. Results indicated that ﬁrms with effective scanning systems pursuing low cost leadership scanned their environments more frequently and more broadly than those ﬁrms with ineffective scanning systems pursuing the same competitive strategy. Furthermore, the ﬁndings suggest that ﬁrms employing effective scanning systems achieve alignment between strategy and environment. Niv, Jehiel and Isaac (1998) in their recent study interviewed CEOs in 46 ﬁrms with regard to the pattern of the environmental scanning they performed. The purpose of the theory is to form a fundament to organized environmental scanning. Beal (2000), in his recent work, puts forward at least three plausible explanations for SME and their environmental scanning results. First, that the set of questions used to measure scanning frequency may lack content validity. Consequently, environmental scanning may be relatively infrequent. Relatively infrequent scanning should be reﬂected in low mean values in the frequency-of-scanning indexes. Thus,

44

Strategy Formulation in Entrepreneurial Firms

scanning of the environmental sectors that arguably have the most impact on ﬁrm performance and the formulation/implementation of competitive strategy occurs relatively infrequently. This ﬁnding provides the most plausible explanation for the non-signiﬁcant relationships found between frequency of scanning and external alignment. Third, the frequency at which CEOs of SMEs scan their environments may not be critical to aligning their ﬁrms’ competitive strategies with the stage of the industry life cycle in which the ﬁrms compete. Other factors such as scope of scanning, accurate assessment of opportunities and threats, and effective use of competitive information may be the key. Finally, it has been argued (Berry, 1998) that, the entrepreneurs’ strategic awareness and their perception of the beneﬁts arising from environmental scanning within the SMEs will be a signiﬁcant determinant of the success and survival of the SME in the long term (Berry, 1998). Developing a Meaningful Mission Statement It is commonly believed that, ‘if you don’t know where you are going, any road can take you there’ (Collis and Montgomery, 1997). A clear vision deﬁnes the rules for acting incrementally and opportunistically. If a business is going to be successful today, creating a vision is a necessity, not a luxury − because no organization can progress without an understanding of where it is going and what it should be trying to achieve (Kakabadse, 2001). It is better to distinguish the term vision from mission. Some people like to consider vision and mission as two different concepts: a mission statement describes what the organization is now; a vision statement describes what the organization would like to become (Campbell and Yeung, 1991). In answer to the question, what is vision? Kakabadse (2001) explains that, in management terms, the word visioning is used to describe an agreement among directors about the future of their organization. It requires access to all relevant information, such as the present state of the company and its values. Everyone has some idea of where they are going and what they want to achieve, but their vision is often outdated, shortsighted or too long term. And when people have different visions there is dispute. A manager facing an unexpected situation can take a decision after asking himself or herself the question ‘will such an action further the company’s vision?’ Vision statements often embody the core values of the founding entrepreneur, and say something about the inspiration behind the company that would not be obvious from a reading of its business plans (Bowman and Kakabadse, 1997). Strategic vision occurs where all acquisitions begin. Management vision of the acquisition is shared with suppliers, customers, lenders, and employees as a framework for planning, discussion, decisions and reactions to change (Sirower, 1997). Sirower also contends that the vision must be clear to large constituent groups and adaptable to many unknown circumstances. In addition, the vision must be a continuous guide to the actual operating plans of the company. If vision does not translate into real actions, it can provoke damaging reactions from competitors (Wit and Meyer, 1998). Bowman and Faulkner indicated

Strategy Formulation in Small and Medium-Sized Enterprises

45

that ‘a vision is an image of a better future, however deﬁned; it is a state to which the company aspires, and therefore can at least logically be achieved. What happens when Komatsu succeed in encircling Caterpillar? Clearly a new vision needs to be adapted if the company is not to sink beneath the competitive waves, enthusiastically telling stories of past triumphs. For an ongoing sense of purpose a mission statement is needed’ (Bowman and Kakabadse, 1997, 181). The literature on mission statements in large ﬁrms and SMEs is both descriptive (Ackoff, 1987; Peters, 1988; Falsey, 1989; Campbell, Devine and Young, 1990; Pearce and Robinson, 1994) and prescriptive (Want, 1986; Pearce and David, 1987). Perhaps the research carried out by Pearce and David (1987) formed the ﬁrst attempt to study empirically the relationship between mission statement and organizational performance in 500 SMEs. It was discovered that, higher performance ﬁrms tend to have comparatively more comprehensive mission statements. It has been posed that; a good mission statement captures an organization’s unique and enduring reason for being, and energizes stakeholders to pursue common goals (Rarick and Vitton, 1995; Bart, 1998). It also enables a focused allocation of organizational resources. Accordingly, we have witnessed some empirical researches in the ﬁelds of deﬁnition and analysis of mission statements content in either large ﬁrms or small and medium-sized enterprises (Campbell et al., 1990; Bart, 1998). For instance, Bart (1998) introduced the content of a good mission statement, based on the results of his research, as the following: • • • • • • • •

purpose, values/philosophy, vision, general corporate goal, and one big goal, distinctive competence, desired competitive position and competitive strategy mention stakeholders and behavioural standard general business deﬁnition, speciﬁc ﬁnancial objectives and non ﬁnancial objectives Speciﬁc market/customers served and speciﬁc product/service offered self concept, desired public image location of business, technology deﬁned concern for survival, customers, employees, suppliers, shareholders and society.

There is ample evidence from the literature that the beneﬁts which organizations derive from mission statements address many of the organizational and leadership problems that characterize growing SMEs (Analoui and Karami, 2003). A mission statement allows the ﬁrm to articulate a strong vision for the organization and to communicate it to its growing number of employees and professional managers (Klemm, Sanderson and Luffman, 1991). The mission statement can also increase the ﬁrm’s legitimacy with new stakeholders such as ﬁnancial institutions and shareholders. The detailed literature and comparative analysis of the mission statements in SMEs is provided in the conceptual framework of the research (Kakabadse, 2001). In light of their mission, entrepreneurs develop the objectives and goals for their business. Objectives are the end result of planned activity. Business objectives convert the mission statement into speciﬁc goals that shape the direction and activities

46

Strategy Formulation in Entrepreneurial Firms

of the business (Lowry, Avila and Baird, 1999). If the vision describes what the corporation wishes to become in many years’ time, an effective corporate strategy must also have a set of shorter-term goals and objectives so as to sustain a 40 per cent equity ratio. Objectives refer to speciﬁc short and medium-term quantitative targets. On the other hand, goals refer to qualitative intentions such as to improve new product development capabilities or becoming a global organization (Collis and Montgomery, 1997). The process of setting objectives for the corporation, Bowman and Kakabadse (1997) have argued, and subsequently for the business unit, is the process of translating the corporation’s strategies into speciﬁc and, if possible, measurable objectives, the achievement of which will signal that the corporation’s adapted strategies are working successfully. They argued that objectives are frequently, but not always, ﬁnancial. They need not even be measurable, but obviously it helps the monitoring process if they are measurable. As discussed, there are typical objectives that a corporation might set for itself in order to provide behavioural signposts regarding the implementation of strategy. Therefore, to be of worth to an SME, objectives should be measurable, achievable, realistic, explicit, internally consistent with each other, and communicable to others (Luffman et al., 1991). Developing Business Strategies for SMEs As discussed, the strategy of a corporation forms a comprehensive master plan stating how the corporation will achieve its mission and objectives. It maximizes competitive advantages and at the same time, minimizes competitive disadvantages (Wheelen and Hunger, 1998). The typical business ﬁrm usually considers three linked and interdependent levels of strategy consisting of corporate strategy, business strategy and functional strategy. Corporate strategy, essentially and simply is deciding what businesses the organization should be in, and how the overall group of activities should be structured and managed (Thompson, 1995). The second level of strategy is business strategy, which is concerned with creating and maintaining a competitive advantage in each and every area of the business. It can be achieved through any one function, or a combination of several (Thompson, 1995). Accordingly, the third level of strategy is functional strategy. Functional strategy is concerned with functional areas of the ﬁrm such as, marketing, ﬁnancial, human resource, and research and development. Developing business strategies is discussed below. Specialization and Diversiﬁcation When a ﬁrm diversiﬁes, it moves out of its current products and markets into a new area. Clearly, this will involve a step into the unknown and will carry a higher degree of business risks (Lynch, 2000). However the ﬁrm may minimize this risk if it moves into related markets (see Figure 2.3). Accordingly, when a ﬁrm moves to unrelated markets, it runs the risk of operating in areas where its detailed knowledge of the key factors for success is limited. Specialization and diversiﬁcation have been central topics in strategy studies

Strategy Formulation in Small and Medium-Sized Enterprises

Figure 2.3

47

The product market matrix

(Ramanujam and Varadarjan, 1989; Hoskisson and Hitt, 1994). Specialization and diversiﬁcation are two fundamental strategies at corporate level and describe the diversity of the activities of the ﬁrm. Very often diversiﬁcation and specialization are deﬁned by the diversity of the product, and industries or strategic business units (SBU) the ﬁrm is in. The importance of diversiﬁcation is clearly related to its widespread adoption in many ﬁrms in market economies (Hitt, Hoskisson and Kim, 1997). Different studies of the diversiﬁcation of SMEs reach the conclusion that the strategic situation of SMEs is characterized by a number of related products or product groups rather than by several discrete businesses. Many scholars tried to study the link between diversiﬁcation and other organizational factors. For instance, theoretical explanations linking diversiﬁcation and performance stem mainly from efﬁciency gains due to economies of scale and scope (Chandler, 1990), learning and domain redeﬁning (Mintzberg, 1987); risk reduction (Chandler, 1962) and top managers’ strategic leadership abilities (Ohmae, 1982). The large body of literature in this ﬁeld provides important insights into the motivation for diversiﬁcation and its subsequent performance consequences (Ramanujam and Varadarjan, 1989; Datta, Rajagopalan and Rasheed, 1991; Hoskisson and Hitt, 1994). The results of other studies of diversiﬁcation in SMEs (Bamberger, 1998) show that, diversiﬁcation is a basic for growth in SMEs. It also has been found

48

Strategy Formulation in Entrepreneurial Firms

that, rising ﬁrm size is related to rising diversiﬁcation of related product groups. Bagchi-Sen and Kuechler (2000) in their recent research examined the association between strategic planning and functional diversiﬁcation (services and markets) in SMEs. They found that, SMEs face considerable difﬁculty in overcoming both inhouse and external barriers in accessing clients requiring non-traditional services (for example management consulting) and clients involved in international businesses. They reported that, the proactive, functionally diversiﬁed, and/or international orientated ﬁrms outperform the reactive, functionally concentrated and local market orientated ﬁrms. The competitive advantage for the former categories is based on ﬂexible specialization such as customization of services for speciﬁc groups of clients, speed of delivery and specialized skills. Another study of diversiﬁcation in the banking industry in Europe (Bamberger, 1998) found a signiﬁcant relation between intended diversiﬁcation and the bank’s size, the CEO perception of competitive intensity and changing market preferences, and the bank’s past variability in proﬁtability. Finally, developing a market niche by differentiating a business from its competitors is a strategy that offers smaller ﬁrms a better chance of sustainable growth. Establishing a market niche is most effective when aimed at a narrowly deﬁned market segment. Sometimes this can involve concentrating on gaps in the market place left by the larger companies. Internationalization Internationalization means that, a ﬁrm is acting in one or several foreign markets and thus, is working in an international context. For SMEs, it is a component of growing importance in their strategic behaviour and therefore all three proposed levels of strategies must be considered. Here, only internationalization strategies at the level of corporate strategy will be dealt with. These are concerned with the choice of foreign target markets, product or services to offer in the chosen foreign markets and the market entry strategies. Market entry strategies in the international ﬁeld concern export, licensing and management contracts, as well as the establishment of sales or production subsidiaries. Forms and phases of internationalization for SMEs are illustrated in Figure 2.4. With respect to SMEs export is mostly discussed. Market entry strategies are also concerned with internal development (development of resources, potentials within the ﬁrm) versus acquisition (buying of companies and merger) strategies and different owner strategies. As far as ownership strategies are concerned, the use of joint ventures is of particular interest. Despite the importance of exporting for SMEs, it is only one element and very often only the ﬁrst step in the internationalization process. The process includes in addition to indirect or direct exportation, the creation of distribution agencies in the foreign countries, the creation of own production facilities abroad, different production strategies, as well as organizational strategies and internationalization of management and capital. The strategies and the level of internationalization should also be studied in relation to the entrepreneurial motivations, values, attitudes and objectives of the SME manager. For instance in a study of the internationalization plans of Swiss SMEs (Bamberger, 1998), with the prospect of the Western European economic integration, it has been found that, most of the companies planned to push

Strategy Formulation in Small and Medium-Sized Enterprises

49

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Phases and forms of internationalization for SMEs

their exports to the EC and only a few planned to establish production facilities abroad. Competitive Strategies for SMEs The ﬁrst fundamental determination of a ﬁrm’s proﬁtability is industry attractiveness. In any industry, whether it is domestic or international, or produces a product or services, the role of the competition is embodied in ﬁve competitive forces: the entry of new competitors, the threats of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the rivalry among the existing competitors (Porter, 1985). The collective strength of these ﬁve competitive forces determines the ability of ﬁrms in any industry to earn, on average, rates of return on investment in excess of the cost of capital. The strength of the ﬁve forces varies from industry to industry, and can change as an industry evolves. The ﬁve forces determine industry proﬁtability, because they inﬂuence the price, costs, and the required investment of the ﬁrm in an industry. The strength of each of the ﬁve competitive forces is a function of industry structure (Porter, 1985). The ﬁve-force framework allows the ﬁrm to see through the complexity and pinpoint those factors that are critical to competition in its industry as well as identify those strategic innovations that would most improve the industry’s proﬁtability. It directs manager’s creative energies toward those aspects of industry structure that are most important to long-run proﬁtability. Finally, the framework aims in the process, to raise the odds of discovering a desirable strategic innovation (Wit and Meyer, 1998). The ﬁve-force model has recently been used to analyse the industry structure in SMEs (Kleindl, 2000).

50

Strategy Formulation in Entrepreneurial Firms

The traditional barriers to competition enjoyed by SMEs, created largely by their ability to serve niche markets and develop strong relationships with customers, are being threatened by Internet enabled businesses. Threat of entry from larger regional, national and international ﬁrms is greater because of the lower transaction costs involved when entering markets dominated by SMEs. These new entrants sometimes represent industries quite far removed from those with which the SME is familiar. For ﬁrst movers with an established Web presence, consumers may have formed relationships with that business or may see the business as the brand name. Suppliers have an incentive to eliminate intermediaries because of the cost savings that can be incurred. This pattern has been enabled because of Web based efﬁciencies in both information ﬂows and distribution ﬂows. The easy access that buyers have to competitive information is placing pressure on prices and is encouraging customers to search for substitutes. Not all industries will face this challenge. How quickly businesses go online is somewhat dependent upon the needs of the ultimate customer. Businesses that require a large person-to-person interface may be later adopters of e-commerce. However, online communication through email and Web pages, developing Extranet links to suppliers, and changing internal communication systems are having an impact on almost all businesses. Competition is at the core of the success or failure of the business. As Porter has discussed, competition determines the appropriateness of a ﬁrm’s activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation. Competitive strategy is the search for a favourable competitive position in an industry, the fundamental arena in which competition occurs (Porter, 1985). The business side of the corporate strategy framework refers to the industries in which a ﬁrm operates, as well as to the competitive strategy it adopts in each. Industry choice is critical to the long-term success of a corporate strategy. It has repeatedly been demonstrated that the best predictor of ﬁrm performance is the proﬁtability of the industries in which it competes (Rumelt, 1991). A set of industries in which a ﬁrm operates also inﬂuences the extent to which it will be able to share resources across its business. The notion of relatedness may be used as a surrogate for a ﬁrm’s ability to create synergy among its business. The particular competitive strategy a ﬁrm pursues in each industry also has an impact on corporate performance. While it may be unusual to ﬁnd a corporation that pursues exactly the same source of competitive advantage in every one of its businesses, it is important to recognize that a corporation’s resources are often only valuable when applied to similar generic strategies (Collis and Montgomery, 1997). To understand how to achieve competitive advantage and how to generalize about the relative position of individual ﬁrms within an industry, Porter (1985) developed the concept of generic strategies, categories of strategy that follow a particular pattern. There are two basic types of competitive advantage, which the ﬁrm can process: low cost or differentiation (Porter, 1985). The two basic types of competitive advantages combined with the scope of activities that a ﬁrm seeks to achieve, lead to three generic strategies for achieving an average performance in

Strategy Formulation in Small and Medium-Sized Enterprises

51

an industry: cost leadership, differentiation and focus. The focus strategy has two variants; cost focus and differentiation focus (see Figure 2.5). Porter has suggested that each of the generic strategies involves a fundamentally different route to competitive advantage, combining a choice about the type of competitive advantage sought with the scope of the strategic target in which competitive advantage is to be achieved (Porter, 1985). The cost leadership and differentiation strategies seek competitive advantage in a broad range of industry segments, while focus strategies vary widely from industry to industry, as do the feasible generic strategies in a particular industry. Competitive advantage is argued by Wit and Meyer (1998) as being at the heart of any strategy, and achieving competitive advantage requires a ﬁrm to make a choice about the type of competitive advantage it seeks to attain and the scope within which it will attain it. It is also reported that the idea of generic strategies emphasizes the consistency of a ﬁrm’s activities and the need to tie each to the ﬁrm’s overall mission. This stresses the importance of not getting stuck in the middle and ultimately failing to build a distinctive competence that creates a competitive advantage (Collis and Montgomery, 1997). Developing an effective competitive strategy is vital for small and medium-sized enterprises. Burns and Harrison (1996) considered a number of generic strategies, whilst Porter (1985) contends that, there are only three fundamental ways of achieving sustainable competitive advantages. Cost leadership This assumes that, costs can be reduced, for example through economics of scale and this is important to customers. This is an inherently unattractive alternative for smaller ﬁrms as they can rarely achieve the economics of scale of large ﬁrms and seldom have the capital to invest constantly in new technology. Differentiation Where the ﬁrm sets out to be unique in the industry along some dimensions that are widely valued by customers. This is called developing a unique

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Generic competitive strategies and their attraction to SMEs

52

Strategy Formulation in Entrepreneurial Firms

selling proposition (USP). The ﬁrm sets out to establish itself as unique and different from its competitors in some ways. It can then charge a premium price. The risks associated with this are that the differentiation cannot be sustained as competitors imitate or the USP becomes less important to customers. If the premium charged is too high, customers may decide not to purchase. This is an attractive strategy for smaller ﬁrms, particularly when combined with the third generic strategy. Focus Where the ﬁrm focuses on a narrow target market segment combined with either of the other strategies. If the ﬁrm adopts a strategy of focused differentiation it is said to pursue a niche strategy. This is a very attractive strategy for SMEs. Focuses can also be used with cost leadership, where concentrating on certain market segments offers some cost advantages. In a survey of some 1500 smaller companies across Europe, Burns and Harrison (1996) reported that, those companies that had seen their sales and/or proﬁt grow in the 1990s, were those that had better or different products or services, and this led to weak-to-normal levels of competition. Another survey into 3,500 of Britain’s ‘Supper League Companies’ concluded that most of these high growth companies served niche markets. In other words, successful ﬁrms follow a strategy of differentiation, probably focused on target market segments. Electronic Commerce (EC) and SME Business Strategies The strategic management of technological innovation and IT are lively, contemporary topics within rapidly changing business environments with frequent technological change and globalized competition. Small and medium-size ﬁrms face special problems in the formulation of their strategies due to their deﬁciencies arising from their limited resources and range of technological competencies. The Internet and the World Wide Web (WWW) are having a major impact on how businesses operate. The Web allows customers to easily search and ﬁnd competitive information and new sources of supply. Internet Protocols (IP) are allowing for close contact between ﬁrms by linking companies and supply-chains through Extranets. As the Internet Technology (IT) revolution continues to expand, cellular phones will act as convenient links to information and ordering. Moving into e-commerce may require a major change in the commerce models that businesses use. Not surprisingly, many businesses are waiting to see if these virtual marketing commerce models are viable because of the transaction costs involved in developing online businesses. They may ﬁnd that they do so at their own peril. Electronic commerce has been deﬁned from different perspectives. From a communications perspective: EC is the delivery of information, products/services, or payment over telephone lines, computer networks, or any other electronic means. From a business process perspective: EC is the application of technology towards the automation of business transactions and work ﬂow. From an online perspective: EC provides the capability of buying and selling products and information on the Internet and other online services (Turban et al., 2000). The notable types of ECs are as follow.

Strategy Formulation in Small and Medium-Sized Enterprises

• • •

•

•

•

53

Business-to-Business (B2B): most of EC today is of this type. It includes information ﬂow among two or more organizations. Business-to-Consumer (B2C): these are retailing transactions with individual shoppers. The typical shopper at Amazon.com is a consumer. Consumer-to-consumer (C2C): in this category consumer sells directly to consumers. Examples are individuals selling in classiﬁed ads and selling residential property, cars and advertising personal services on the Internet and selling knowledge and expertise. Consumer-to-business (C2B): this category includes individuals who sell products or services to organizations, as well as individuals who seek sellers, interact with them and conclude a transaction. Non-business EC: An increased number of non-business institutions such as academic institutions, not-for-proﬁt organizations, religious organizations, social organizations and government agencies are using various types of EC to reduce their expenses or to improve their operations and customer services. Intra-business (organizational) EC: this category includes all internal organizational activities, usually performed in intranet, that involve exchange of goods, services or information.

Regarding the beneﬁts of EC to the organizations, EC expands the marketplace to national and international markets and decreases the cost of creating, processing, distributing, storing and retrieving paper-based information. It allows reduced inventories and reduces telecommunication costs, and the time between the outlay of capital and the receipt of product and services (Komenar, 1997; Turban et al., 2000). Electronic commerce has more beneﬁts to consumers. It enables customers to shop or carry out other transactions 24 h a day, all year round, from almost any location. It provides the customer with more choices; they can select from any vendor and from more products and with less expensive products and services by allowing them to shop in many places and conduct quick comparisons. It allows quick delivery and customers can receive relevant and detailed information in seconds, rather than days or weeks. EC also makes it possible to participate in virtual auctions. It allows customers to interact with other customers in electronic communities and exchange ideas as well as compare experiences and ﬁnally; it facilitates competition, which results in substantial discount (Adam and Yesha, 1996). Market economics, technological and societal pressures force organizations to respond. Traditional responses may not be sufﬁcient due to the magnitude of the pressures and the frequent changes involved (Turban et al., 2000). Therefore, organizations frequently must use innovations and reengineering of their operations. In many cases, EC is the major facilitator of organizational responses. While SMEs typically do not have the capital and human resources of larger competitors, many appear to be making signiﬁcant investments in information technology. Companies with 500 or fewer employees spent over $200 billion on technology products and services in 1998, over ﬁve times as much spent by larger companies (Caldwell and Wilde, 1998; Wilde, 1998).

Strategy Formulation in Entrepreneurial Firms

54

SMEs are developing websites, Intranets and using email at close to the same percentages as larger businesses. However, they have been slower to adopt ecommerce applications (Wilder, 1999). This hesitancy could be due to the high cost of setting up and maintaining e-commerce applications. A viable option for SME e-commerce is to outsource to third party companies (De Soto, 1998). Table 2.3 summarizes ﬁndings from a survey of over 400 information technology managers worldwide (Engler, 1999). Major technology strategies are recommended for SMEs attempting to compete in the contemporary global environment. Relative to larger ﬁrms, smaller businesses who make effective use of Internet opportunities may also ﬁnd that they can be more innovative, faster in responding to environmental demands and better able to quickly change or adapt business models to gain competitive advantage. Using IT in order to improve customer services through online systems can be considered as a new strategy for SMEs. Online systems allow channel members and consumers to gain access to product and inventory information. Globalization and internationalization push SMEs to use electronic commerce. Electronic commerce allows SMEs access to larger markets without the cost of setting up new distribution systems. It also allows SMEs to target narrow markets faster than larger competitors. Lower overhead costs can be carried over to lower prices to customers. Online connections between the SME and its customers increase the speed of response and allow for close to instant communication. Linked extranets allow SMEs Table 2.3

Strategies used by SMEs

Strategy

Advantages

Improved customer services

Online system allows channel members and consumers to gain access to product and inventory information.

POR: 80% Electronic commerce

POR: 60% Customer relationship management application

POR: 50% Increased business to business connections (extranets) POR: 40% POR: Percent of Respondents Adapted from Kleindl, 2000.

This allows SMEs access to larger markets without the cost of setting up new distribution systems. It also allow SMEs to target narrow markets faster than larger competitors. Lower overhead costs can be carried over to lower prices to customers.

Online connections between the SME and its customers increase the speed of response and allow for close to instant communication. Linked extranets allow SMEs to act as virtual partners with other businesses.

SMEs can act as a virtual making intermediary linking larger businesses with very small suppliers. Online access to inventory and suppliers helps control access.

Strategy Formulation in Small and Medium-Sized Enterprises

55

to act as virtual partners with other businesses. Increased business to business (B2B) connection has been considered as another strategy for SMEs (Engler, 1999). SMEs can act as a virtual intermediary linking larger businesses with very small suppliers. Online access to inventory and suppliers helps to control access. In summary, SMEs are facing constant change in their competitive environment that will force them to modify or completely abandon many current business practices. They must consider new business models that take advantage of existing and emerging Internet-based technologies in order to stay competitive. Their willingness to adopt new technologies is also likely to inﬂuence their ability to hire and retain new talent. While internal development may not be feasible for many resource-poor SMEs, the use of IT can provide SMEs with the ability to compete. Strategy implementation in SME The third aspect of strategic management in SME is implementation and control of strategy (Oladeji, 1998; Voss, 1998; Noble, 1999). It has been argued that, well − formulated strategies only produce superior performance for the ﬁrm when they are successfully implemented (Robinson and Pearce, 1984; Noble, 1999). The implementation of business strategy has been the subject of increased study and search for solutions, especially since the process from strategy formulation to strategy implementation is not efﬁcient and is, certainly in the present business environment, inadequate (Hauc and Kovac, 2000). Kalai and Ledyard (1998) compared traditional and new paradigm of strategy implementation in the organizations. They stated that, in the case of traditional static implementation it is often impossible for strategists to enforce their optimal outcomes. And when restricting the choice to dominantstrategy implementation, only the dictatorial choices of one of the participants are implementable (Kalai and Ledyard, 1998). Recently, the strategy implementation in SMEs is considered as a dynamic activity within strategic management process. For instance, Wheelen and Hunger (1998) consider strategy implementation as a process, which might involve changes within the overall culture, structure, and/ or, management system of the entire organization. Grundy (1998) in his work investigated the strategy implementation in project management. He concluded that, a number of tools from strategic management, value management and from organizational change can be imported into project management to enrich traditional techniques considerably. These tools are particularly powerful when applied to complex and multi-functional projects which are entailed when attempting to turn business strategy into implementation. A review of literature reveals few formal deﬁnitions of strategy implementation. Some of the different views of strategy implementation are as follow: •

•

Implementation is a series of interventions concerning organizational structure, key personal actions, and control systems designed to control performance with respect to desired ends (Hrebiniak and Joyce, 1984). The implementation stage involves converting strategic alternatives into an operating plan (Aaker, 1988).

Strategy Formulation in Entrepreneurial Firms

56

•

• •

Implementation refers to the ‘how-to-do-it’ aspects of marketing. Implementation deals organizational issues, with the development of speciﬁc marketing programs, and with the execution of programs in the ﬁeld (Cespedes, 1991). Implementation is the managerial interventions that align organizational action with strategic intention (Floyd and Woolridge, 1992). Strategy implementation is the process by which strategies and policies are put into action through the development of programs, budgets, and procedures (Wheelen and Hunger, 1998).

The literature shows that, many scholars highlighted three main factors in strategy implementation mainly the structure, leadership style, and resources (Hrebiniak and Joyce, 1984; Lorange, 1998; Noble, 1999; Hauc and Kovac, 2000). Organizational structure Formulating strategy is very difﬁcult, but the more problematic task confronting the CEOs in small and medium-sized enterprises (SME) is the successful implementation of strategy (Miller, 1988). To implement strategy successfully, attention must be paid to a number of organizational issues, especially organizational structure (Miller, 1988; Hrebiniak, 1990). The CEO must be concerned with a number of areas that are important for strategy implementation in SME, such as carefully considering the role of structure, and exercising appropriate leadership. Although, extensive research has examined the relationship between strategy formulation and organizational structure, only limited attention has been given to the contingency between organizational structure and implementation process (for example Porter, 1980; Smith and Fleck, 1987; Berry, 1998; Noble, 1999). Given the earlier arguments, it is expected that performance in small and medium-sized ﬁrms is correlated with the use of structural features that, must support the strategy (Miller and Toulouse, 1986; Miller, 1988). Goldsmith (1995) indicated that, implementing strategy is critical. It has two main aspects, one formal, and the other informal: they are organizational structure and organizational culture. For instance, Gupta (1987) examined the relationship between SBUs’ strategies, aspects of the corporate-SBU relationship, and implementation and found that, structures that are more decentralized produce higher level of SBU effectiveness, regardless of the strategic context. Drazin and Howard (1984) suggest that, a proper strategy-structure alignment is a necessary precursor to the successful implementation of new business strategies. Leadership style The leadership style of the senior managers including CEOs can have a signiﬁcant effect on implementation of strategy. Nutt (1983) considers the link between the organizational climate and various approaches to implementation. In this view, the management of the implementation process generally requires a driving force in the organization in order to succeed. Another aspect of implementation style considered by Nutt (1986) is the base of power used in the implementation process. The power

Strategy Formulation in Small and Medium-Sized Enterprises

57

base employed is closely tied to the technique used to guide implementation. He suggests that, managerial tactics and leadership style can play a critical role in overcoming the lower-level obstructionism that is prevalent to some extent in many implementation efforts. Gupta and Govindarajan (1984) address the relationship between the characteristics of an SBU’s general manager and the perceptions of effectiveness in strategy implementation. The result of this research show that successful SBUs should have general managers with greater marketing/sale experiences, greater willingness to take risk, and greater tolerance for ambiguity. Best (1997) highlights three major forces that affect the successful implementation of strategic marketing plans: 1. ownership of the plan, 2. supporting the plan, and 3. adaptive planning. Ownership becomes more complex in team-orientated implementation, but ownership also enhances the process by leveraging the unique talents of team members. In this regard the role of owner/managers or entrepreneurs in SMEs can not be ignored. Noble (1999) argued that, senior management can alleviate problems that result when groups of individuals interact to implement corporate strategy. Through an understanding of the fundamental stages and elements of an implementation effort, they can build an effective cross-functional implementation network (Noble, 1999). Parsa (1999) investigated, the impact of source of power on franchisees’ strategy implementation process and eventual performance. Results from the study indicate that ﬁnancial performance of the franchisees was affected by the method of implementation they chose. This study demonstrates that interaction of power sources and strategy implementation could impact a ﬁrm’s performance and satisfaction. The results demonstrate that a proper match between the implementation methods and the desired outcomes is essential. Congruence between the sources of power and implementation and its effect on eventual performance was documented (Parsa, 1999). Human Resources It has been discussed that (Analoui, 2000; Rousseau and Rousseau, 2000) successful strategy realization is determined by the coherence of decisions and actions of all employees at all levels of the organization, and not just by the people who originally deﬁned the strategy. This is also the reason why efﬁcient and effective communication of an SME’s strategy, for example, to all people within the organization is fundamental. Rousseau and Rousseau (2000) reported that, in a recent survey conducted in association with Robert Kaplan of the Harvard Business School and Business Intelligence, more than 40 per cent of senior managers and more than 90 per cent of all employees stated they did not believe they had a clear understanding of their company’s strategy. In too many cases, when looking at the ‘big picture,’ if all decisions made throughout an organization are consolidated, it becomes clear

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Strategy Formulation in Entrepreneurial Firms

that those decisions are often inconsistent in their objectives, or may even have conﬂicting objectives (Fulmer, 1990; Bowman and Kakabadse, 1997). To ensure that strategy is realized at all levels of the organization, a mechanism is necessary to direct all employees towards the same strategic performance management. In recent years, there has been a growing awareness that human resource management (HRM) is a factor that can, or at least should, play an important role in the development and implementation of effective strategic plans in SMEs (Fulmer, 1990; Beer, 1997; Boxall and Steeneveld, 1999). It is in strategy implementation that HRM may be able to play its most signiﬁcant role. In this regard, the SMEs’ senior managers would view human resources activities as equal to ﬁnance, operations and marketing. The ﬁrm’s HRM would be involved from the outset in developing and implementing strategic plans. Both technical (task-related) and managerial skills (people and self-related) are necessary to formulate and implement strategic planning (Fulmer, 1990). The review of the literature in Chapters 2 also indicates that, most researchers (Bennett, Ketchen and Schultz, 1995; Boxall, 1996) seem to have emphasized on HR as a factor in determining the effective implementation of strategies in the ﬁrms. Generally, the business strategies were successfully implemented when, top managers viewed employees as the strategic resources. Strategy Evaluation and Control Evaluation and control is the process by which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Senior managers of SMEs use the resulting information to take corrective action and resolve problems. Although evaluation and control are the ﬁnal major element of strategic management, they also can pinpoint weakness in previously implemented strategic plans and thus stimulate the entire process to be again. For evaluation and control to be effective, managers must obtain clear, prompt, and unbiased information from the people below them in the SME’s hierarchy (Wheelen and Hunger, 1998). It has been argued that, employing control system by SMEs managers depends on their awareness of strategy (Lorange, 1998). For instance, Emotional Intelligence (EI) testing done on a group of SME owner-managers showed clearly that owner/mangers with low EI held back their company’s growth by trying to hold onto total control. It was found that they tended to have high independence, low trust, low empathy high aggression scores, and also tended to have extremely high stress levels. Managers who let their people take responsibility and did not hold onto control had high score on consideration for others, tolerance and sociability. They were also much less stressed than the other owner managers-and they had proﬁtable, booming companies (Lorange, 1998). The evaluation and control of performance completes the strategic management model. Based on performance results, management may need to make adjustments in strategy formulation, in implementation, or in both.

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Summary and Conclusion Research into strategy formulation has come a long way since the early work in the 1960s. Nevertheless, many of the earlier concepts are still valid today and still their reﬂections can be seen in the assumptions employed by contemporary researchers. While earlier work, by and large, was directed at identifying reasons for superior performance, the focus later shifted towards the processes involved in formulating and the search for sources of competitive advantage in small and medium-sized enterprises. With the increasing level of dynamics in the competitive environments, researchers have realized the need for adopting a dynamic approach to strategy formulation in entrepreneurial ﬁrms. However, there is no integrated framework with which dynamic strategy formulation and implementation can be realized. In this chapter a realistic strategic management process in entrepreneurial ﬁrms has been put forward. It is posed that the ﬁrst step in strategic management for entrepreneurial ﬁrms is environmental scanning. Most small business owner-managers who are responsible for both operational and strategic planning conduct environmental scanning regularly. The literature suggests three types of scanning. These include; irregular scanning, intermittent scanning, and continuous scanning. There is ample support for the view that ﬁrms with effective scanning systems pursuing low cost leadership scanned their environments more frequently and more broadly than those ﬁrms with ineffective scanning systems pursuing the same competitive strategy. The second aspect is the formulation of strategies. The typical business ﬁrm usually considers three linked and interdependent levels of strategy consisting of corporate strategy, business strategy and functional strategy. The corporate strategy of a ﬁrm determines its different product/market combinations. By corporate strategy the ﬁrm deﬁnes the scope of its activities. Business strategy is concerned with creating and maintaining a competitive advantage in each and every area of the business. The ﬁrm’s strategy at the functional level, include R&D, marketing, HR, ﬁnancial, technology, production and operation strategies. Developing an effective competitive strategy is vital for small and mediumsized enterprises. Competitive strategy is the search for a favourable competitive position in an industry, the fundamental arena in which competition occurs. The particular competitive strategy a ﬁrm pursues in each industry also has an impact on corporate performance. Increased business-to-business (B2B) connection and using IT have been considered as an important strategy for entrepreneurial ﬁrms. Finally the third aspect of strategy in entrepreneurial SMEs is strategy implementation and control. Implementation is the managerial interventions that align organizational action with strategic intention. Strategy implementation is the process by which strategies and policies are put into action through the development of programs, budgets, and procedures. In this research three factors associated with effective strategy implementation including leadership, organizational structure, and human resources are considered.

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Chapter 3

Researching Strategy Introduction This chapter sets out the various steps that are necessary in executing this study and thereby satisfy its objectives. It aims to explain in detail all aspects of the research programme, with particular reference to all the key theoretical and practical issues involved. This chapter will provide a review of the methodology of research, which consists of ﬁve major activity stages. First, in order to present the research approach within the literature, the chapter starts with a theoretical discussion on methodology and research in strategic management. The chapter will continue with a theoretical discussion on research design and consequently the chosen research design and research process for this research will be discussed. Second, the research objectives and research hypotheses will be discussed in some detail. In this section the sample and criteria for selecting sample ﬁrms will be discussed. Third, the literature on strategic management in SMEs will be synthesized and a dynamic model of strategic management in entrepreneurial SMEs will be introduced. Accordingly, a conceptual framework of senior managers’ perceptions of strategic management in small and medium-sized enterprises will be provided. This section also provides details of the research variables. In the fourth section the data collection techniques, questionnaire construction and survey process will be described. Finally, in the last section data analysis methods and the statistical techniques employed will be discussed. Methodology in Management Researches: A Positivistic Approach Perhaps before discussing the methodology of strategic management research in general and the current research in particular, it would be useful to deﬁne research methodology (Curran and Blackburn, 2001). Remenyi et al. (1998) argued that, research methodology refers to the procedural framework within which the research is conducted. It describes an approach to a problem that can be put into practice in a research program or process. Accordingly, it has been argued (Robson, 1997; Malhotra, 1999; Burns, 2000) that, methodology is understood to be the general principles behind research, whereas methods are the practical techniques used to undertake research. From this point of view, methodology provides the link between technique and theory. In general it has been argued (May, 1997) that, the ‘aim of positivism is to collect and assemble data on the social world from which we can generalise and explain human behaviour through the set of our theories’ (p. 10). In order to consider the importance of a positivistic approach in management studies, it is useful to

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see what is the nature of social science. All theories of organizations are based upon a philosophy of science and a theory of society (Burrell and Morgan, 1993; Root, 1996). Sociological scientists approach their subject via explicit or implicit assumptions about the nature of the social world and the way in which it may be investigated (Sayer, 1992). Smith argues that the purpose of science is to develop laws. To develop a scientiﬁc law you start from the observation of a particular set of objects and look for regularities. A scientiﬁc law which is one of general assumptions of positivism is a general statement which describes empirical regularities which occur in different places and at different times (Smith, 1998). There are different assumptions about the nature of social science. Burrell and Morgan (1993) developed a scheme for analysing assumptions about the nature of social science. First, there are assumptions of an ontological nature -assumptions which concern the very essence of the phenomena under investigation. Social scientists are faced with a basic ontological question: whether ‘reality’ is of an objective nature or the product of individual cognition. Ontology involves the study of theories of being, the questions we ask about what can really exist (Smith, 1998). Associated with this ontological issue, is a second set of assumptions of an epistemological nature. These are assumptions about the ground of knowledge − about how one might begin into understand the world and communicate this as knowledge to fellow human beings. Epistemology involves the study of theories of knowledge, the question we ask about how we know (Smith, 1998). The epistemological assumptions in these instances determine extreme positions on the issue of whether knowledge is something, which can be acquired on the one hand, or is something, which has to be personally experienced on the other. Burrell and Morgan (1993) argued that there is a third set of assumptions concerning human nature and in particular the relationship between human beings and their environment. This view tends to be one in which human beings and their experiences are regarded as products of the environment: one in which humans are conditioned by their external circumstances. The three sets of assumptions outlined above have direct implications of a methodological nature. Each one has important consequences for the way in which one attempts to investigate and obtain ‘knowledge’ about the social world. Different ontology, epistemologies, and models of human nature are likely to incline social scientists toward different methodologies. Positivism is a term with many uses in social sciences and philosophy. In particular, positivist science has a preference for empirical data, which can be observed and measured so that the various component parts can be compared for their relative frequency (Smith, 1998). It embraces the notion that human affairs ought to be conceived as belonging to a natural order open to objective enquiry (Hollis, 1994). The idea behind logical positivism is that, because knowledge of the world can be justiﬁed only by experience, we are never entitled to assert the existence of anything beyond all possible experiences (Hollis, 1994). Positivism in social science may be broadly represented as depending upon the assertion that the concepts and methods employed in natural science can be applied to form a ‘science of man’ or a natural science of society (Giddens, 1978). It has been maintained that the word positivist has become more of a derogatory epithet than a useful descriptive concept (Giddens, 1978). Burrell and Morgan (1993)

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argued that, most of the descriptions of positivism in current usage refer to one or more of the ontological, epistemological or methodological dimensions of their scheme for analysing assumptions with regard to social science. They indicated that, we use ‘positivist’ here to characterize epistemologies, which seek to explain and predict what happens in the social world by searching for regularities and causal relationship between its constituent elements (Burrell and Morgan, 1993). Positivist epistemology is in essence based upon the traditional approaches, which dominate the natural sciences. Positivist may differ in terms of detailed approach. Some would claim for example, that hypothesized regularities can be veriﬁed by an adequate experimental research programme. Others would maintain that, hypotheses can only be falsiﬁed and never demonstrated to be true. It is argued that, both ‘veriﬁcationists’ and ‘falsiﬁcationists’ would accept that, the growth of knowledge is essentially a cumulative process in which new insights are added to the existing stock of knowledge and false hypotheses eliminated (Burrell and Morgan, 1993). Positivist opposed by anti-positivist theory. The epistemology of anti-positivism may take various forms but is ﬁrmly set against the utility of a search for laws or underlying regularities in the world of social affairs (Douglas, 1970). For the antipositivist, the social world is essentially relativistic and can only be understood from the point of view of the individuals who are directly involved in the activities which are to be studied (Donaldson, 1996). Anti-positivists, reject the standpoint of the ‘observer’, which characterizes positivist epistemology as a valid vantage point for understanding human activities (Burrell and Morgan, 1993). From this point of view social science is seen as being essentially a subjective rather than an objective enterprise. Overview of Research Methods Employed in Strategic Management The best place to overview and discuss about research methods in strategic management is Hoskisson et al.’s recent research work (Hoskisson et al., 1999). During the early development of the strategic management theories, scholars (Ansoff, 1965; Andrews, 1971) emphasized the normative aspect of business knowledge and were chieﬂy interested in identifying and developing the ‘best practices’ that were useful for managers. Their principal goal was to impart knowledge to practitioners, rather than to pursue knowledge for scientiﬁc advancement. The most appropriate method for accomplishing this objective is inductive in character: in-depth case studies of single ﬁrms or industries. Therefore, they concluded that, the most valid methodology to achieve their purposes was case studies. This discipline has been criticized. For instance Learned et al. (1969) argued that, these disciplines may not be appropriate for strategy studies because ‘knowledge generated for one set of ends is not readily applicable for another’ (p.6). In comparison, Chandler’s strategy and structure is less normative or prescriptive in nature, although the research methods employed are still inductive (Rumelt, Schendel and Teece, 1994). Unlike Andrews (1971) and Ansoff (1962), Chandler (1962) attempted to seek generalization across a wider population of ﬁrms. Overall, the approach used by

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prominent strategy scholars during this period was mainly normative or prescriptive in purposes, with in-depth case analysis as the primary research tool. Tremendous changes in the methodology of strategic management occurred during the last three decades. Schendle and Hatten (1972) strongly advocated that strategic management needed empirical research to show a relationship between variables as ‘the conceptual development of the ﬁeld has outstripped the research derived evidence available to support, deny or modify it’ (p.101). Furthermore, they pointed out the need for strategy research to go beyond the inductive approach and for more deductive studies with ‘reliable data specially collected to allow the development of testable answers to strategic questions’ (Schendle and Hatten, 1972, 102). Although normative, inductive case based studies had dominated the early history of strategic management, positivistic, deductive empirical research became dominant during this period. Therefore, concern with explanation and prediction, rather than prescription, was strongly advocated by strategy scholars with the aim to elevate the ﬁeld to a more rigorous ‘scientiﬁc’ academic discipline. Although the sample size in most studies was usually less than 100 in the earlier period, a typical study now has at least 100 observations and can to as large as tens of thousands of observations (for example Chen and McMillan, 1992; Gimeno and Woo, 1996). During this period, researchers have expanded signiﬁcant effort to construct data sets by means of large-scale surveys. Also increasing the attention paid to the methodological issues helped to advance the research rigour in the strategic management ﬁeld. The choice of quantitative methods or qualitative methods has been the subject of controversy and the apparent ‘dominance’ of more quantitativebased methodological tools in the development of the ﬁeld does not mean that these tools are applicable to all research questions (Hoskisson et al., 1999; Curran and Blackburn, 2001). The research question and context should dictate the choice of appropriate method. Moreover, the integration of quantitative and qualitative methodological tools (Judge and Zeithaml, 1992; Hitt, Gimeno and Hoskisson, 1998) is likely to be a fruitful course, especially in strategic management research. Research Design: Qualitative or Quantitative Research? It is especially important to understand and to contract two kinds of evidence that may be collected in business and management studies − qualitative and quantitative (Curran and Blackburn, 2001). Qualitative research uses words to describe situations, individuals, or circumstances surrounding a phenomenon. While quantitative research uses numbers usually in the form of counts or measurement to attempt to give precision to a set of observations (Remenyi et al., 1998). The evidence can be essentially qualitative, for instance written company reports, and quantitative such as measurement of performance of the subject of interest. It has been argued that, qualitative research is situational or contextual, often based on a case study and its particular circumstances (Bryman, 1988; Robson, 1997). Qualitative research is aimed at discovering meaning and involves both interpretation and a critical approach to social work. Research questions are posed, rather than hypotheses and theory is often grounded in data. Concepts are in the

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form of themes, rather than relationships. Data are often in the form of words from observation, documents, interviews and participation. For qualitative researchers the fundamental questions is not whether the data proves or disproves a given theory but how to go about theorizing and generalizing from data (Robson, 1997). In contrast, the ‘quantitative research method relies mainly on a hypotheses which is derived from theory deductively. The objective is to test the theory by way of observation and data collection, the ﬁndings of which, following analysis would either conﬁrm or reject the theory’ (Robson, 1997, 11). In quantitative research the causal relationship between variables are investigated. The primary data are collected mainly using questionnaire and structured interview. In business and management studies, quantitative research has been compared with the methodology that natural scientists use in their investigations, with the same core language of approach including terms such as variable, control, measurement, experiment, reliability, and validity (Bryman, 1988; Remenyi et al., 1998). Considering different aspects of both qualitative and quantitative methodologies, this question is raised; which one is the most appropriate research method in strategic management research? In an attempt to answer this question different aspects of both methodologies will be overviewed. Quantitative Research Method Quantitative research is often conceptualized by its practitioners as having a logical structure in which theories determine the problems to which researchers address themselves in the form of hypothesis derived from general theories. These hypotheses are invariably assumed to take the form of expectations about likely causal connections between the concepts, which are the constituent elements of the hypotheses. In quantitative research the researcher uses quantitative data. Normally, the data, which have been measured in interval level, is considered as quantitative data. However, the measured data in ordinal level can also be treated as quantitative data. The obvious beneﬁts of quantitative data are that, the numerical form makes comparison easy, data are standardized, visible and amenable to the test of classical survey statistics (Hart, 1987). In general, sample size is greater and controlled in such a way as to be representative of the population from which they are drawn. This allows greater conﬁdence in accepting the reliability of or the ability to generalize, the ﬁndings. Figure 3.1 captures some of the main ingredients of the quantitative research process. One portion of quantitative research is the need to render observable the concepts which are rooted in the hypotheses derived from a prior theoretical scheme. Thus, the quantitative researcher tends to be concerned about relating those concepts to one another in order to investigate associations and to tease out causal processes. The measurement of concepts tends to be undertaken through the use of questionnaire devices or some form of structured observation. Quantitative research is often highly preoccupied with establishing the causal relationships between concepts. The frequent use of the terms ‘independent variable’ and ‘dependent variable’ by quantitative researchers is evidence of the widespread tendency to employ causal

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+

+& =

; <

&

&

< & &

Figure 3.1

The structure of quantitative research process

imagery in investigations. Another aspect of quantitative research is that, the result of a particular investigation can be generalized beyond the conﬁnes of the research location. By verifying generality, the quantitative researcher draws nearer to the lawlike ﬁndings of the science. Accordingly, the replication of established ﬁndings is often taken to be a characteristic of natural science. Replication can provide a means of checking the extent to which ﬁndings are applicable to other contexts. Finally, quantitative research tends to treat the individual as the focus or empirical enquiry. Qualitative Research Method Recently, a thoughtful and comprehensive discussion of the principal qualitative research methods and a convincing rationale for using them in management has been provided (Hurley, 1999). Van Maanen (1983) describes qualitative methods as an array of interpretative techniques, which seeks to describe, decode, translate,

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and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world. Similarly, Chisnall (1986) deﬁnes the essence of qualitative research as diagnostic attempt to discover what may account for certain type of behaviour, seeking a deeper understanding of factors, sometimes covert, which inﬂuence the decisions. Qualitative methods offer powerful and versatile techniques to examine the complexities and subtleties in the complicated sets of relationships in business and management studies. In spite of the advantages of quantitative research, it has been argued that, it is not possible to use quantitative methods in some speciﬁc circumstances (Marshal, 1985; Bryman, 1988; Malhotra, 1999; Burns, 2000). For instance qualitative research is appropriate methodology in the following circumstances: • • • • • •

Research that can not be done experimentally for practical or ethical reasons Research that delves into complexity and processes Research for which relevant variables have yet to be identiﬁed Research on unknown societies or innovative systems Research on informal and unstructured linkages and processes in organizations Research on real as opposed to stated organizational goals (Marshal, 1985).

Malhotra (1999) argues that, like secondary data analysis, qualitative research is a major methodology used in exploratory research. Researchers undertake qualitative research to deﬁne the problem or develop an approach. In developing an approach, qualitative research is often used for generating hypotheses and identifying variables that should be included in research. In business and management studies, qualitative research provides the fundamental understanding of peoples’ language, perceptions, and values. Qualitative most often provides the understanding that allows us to decide on the information we must have to solve the research problem and how to properly interpret that information (Malhotra, 1999). Choosing the Research Methodology Research into strategy formulation and implementation should reﬂect the dynamics of change. In highly dynamic and uncertain environments there is no single generic method to research. Robson (1997) argued that, although qualitative and quantitative methodological approaches are different, it is wrong to oppose them as two competing methodologies. For some researchers however qualitative and quantitative research are simply different ways of conducting the research, each of which may be most appropriate to different kind of research questions. For instance, qualitative researchers may resort to some form of quantiﬁcation in their work, and for a survey to be successful a quantitative researcher must integrate some qualitative knowledge into the survey’s design and interpretation, and/or understand peoples frame of reference (May, 1997). Different methods have different advantages and disadvantages but can be mutually supportive (Thomas, 1984). The difference between the two research methodologies in business and management studies, are summarized in Table 3.1.

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Table 3.1

Qualitative versus quantitative research Qualitative Research

Quantitative Research

Objective

•

To gain a qualitative understanding of the underlying reasons

•

To quantify the data and generalize the results from the sample to the population

Sample

•

Small sample size

•

Large sample size

Data collection

•

Unstructured

• •

Structured Semi-structured

Data analysis

•

Non-statistical

•

Statistical

Outcomes

•

Develop an initial understanding

•

Recommend a ﬁnal course of action

Qualitative research provides insights and understanding of the problem setting, whereas quantitative research seeks to quantify the data and typically uses some form of statistical analysis. While quantitative methods are necessary to test the validity and general applicability of research ﬁndings, the potential of in depth quantitative studies diminishes rapidly as the underlying conditions change in a dynamic environment. Researching strategy formulation and implementation therefore requires the right balance between qualitative and quantitative methods. Figure 3.2 presents a contingent research approach the aim of which is to identify such a balance. Whenever a new management research problem is being addressed, quantitative research must be preceded by appropriate qualitative research. Langer (1999) argued that, qualitative research studies should always be followed by quantitative research to test the hypotheses. >@,H++,+

>@,!+,+ , & &

{ {

" { {

Figure 3.2

Contingent approach to research method

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An example might be ﬁnding out what consumer needs are in order to create new product concepts, which will be shown in subsequent qualitative research. It is a principle of research in business and management studies, more especially strategic management, to view qualitative and quantitative research as complementary, rather than in competition with each other (Hunt, 1991). Using a combination of qualitative and quantitative research methods as a contingency approach in management researches, has been used by different researchers, for instance, Analoui (1990) and Feurer, Chaharbaghi and Wargin (1995). The degree to which quantitative and qualitative studies are used will depend on the environmental circumstances of the ﬁrms. In turbulent environments, research will focus on developing conceptual knowledge by relying on qualitative studies, whereas in more static environments quantitative studies are favoured for testing and validating existing conceptual knowledge. Research Process Developing an appropriate research process is considerable crucial point in research methodology, because there is no overall consensus about how to conceptualize the ‘doing’ of a research. There are different views about the place and role of theory; also about the sequence and relationship of the activities involved in a research, for instance, data collection and analysis are intertwined (Nachmias and Nachmias, 1996; Robson, 1997; Remenyi et al., 1998; Curran and Blackburn, 2001). Robson (1997) has classiﬁed the research processes into two categories. ‘One is variously labelled as positivistic, natural science based, hypothetic-deductive, quantitative or even simply “scientiﬁc”; the other as interpretive, ethnographic or qualitative – among several other labels’ (Robson, 1997, 18). The scientiﬁc approach is usually regarded as starting with theory and involving ﬁve sequential steps as follows: • •

• • •

Deducting a hypothesis testable proposition about the relationship between two or more events or concepts from the theory. Expressing the hypothesis in operational terms (that is once indicating exactly how the variables are to be measured), which propose a relationship between two speciﬁc variables. Testing this operational hypothesis. This will involve an experiment or some other forms of empirical enquiry. Examining the speciﬁc outcome of the enquiry. It will either tend to conﬁrm the theory or indicate the need for its modiﬁcation. If necessary, modifying the theory in the light of the ﬁndings. An attempt is then made to verify the revised theory by going back to the ﬁrst step and repeating the whole cycle.

In contrast, a major difference in the interpretive approach against the scientiﬁc approach is that, theories and concepts tend to arise from the enquiry. They come after data collection rather than before it. Because of this, it is often referred to as ‘hypothesis generating’ (as against ‘hypothesis testing’) research (Robson, 1997).

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Reviewing the early studies in strategic management shows that, the most appropriate research methods for accomplishing strategy research objectives was inductive in character: in-depth case studies of single ﬁrms or institutes (Hoskisson et al., 1999). Overall, the approaches used by prominent strategy scholars during the foundation period were mainly normative or prescriptive in purpose, with in-depth case analysis as the primary research tool (Rumelt, Schendel and Teece, 1994). There is some criticism of this approach (Silverman, 1998; Hoskisson et al., 1999). According to Hoskisson et al. (1999) ‘generalisation was practically unfeasible or desirable, as each case is assumed to be complex and unique. These disciplines may not be appropriate for strategy studies because knowledge generated for one set of ends is not readily applicable to another’ (p. 423). The development of the research methods in strategic management studies within the last decade has been dramatic. While its roots have been in normative and inductive disciplines, the current ﬁeld of strategic management research, is strongly empirical research and deductive. According to Hoskisson et al. (1999), ‘although, normative, inductive case-based studies had dominated the early history of strategic management, positivistic, deductive empirical research became dominant during this period. Therefore concern with explanation and prediction, rather than prescription, was strongly advocated by strategy scholars with the aim to elevate the ﬁeld to a more rigorous, scientiﬁc academic discipline’ (Hoskisson et al., 1999, 431). In this research the researcher employs a process which is based on the hypotheticdeductive discipline. According to McNeill (1990), the hypothetic-deductive research process, starts with the phenomena, out there in the world, which can be observed objectively. These sometimes-casual observations prompt ideas in the mind of the researcher, from which they develop and hypothesize. The researcher should try to prove the hypothesis wrong. An experiment is then carried out (or data collected in the ﬁeld) and results are analysed. The hypothesis is then tested against the results. If the evidence does not support the hypothesis, it can be rejected or revised, and a fresh hypothesis developed. If the evidence supports it, then it can be seen as a contribution to theory (McNeill, 1990). Objectives of Study and Research Questions Although the economic beneﬁts of planning have received much attention in the general management literature (for example, Kudla, 1980; Armstrong, 1982; Shrader, Taylor and Dalton, 1984; Rhyne, 1986; Pearce, Freeman and Robinson, 1987; Miller and Cardinal, 1994), the strategic planning-performance relationship appears to have been largely overlooked in the SME literature (Bracker and Pearson, 1986; Feltenstein, 1992; McKiernan and Morris, 1995). Recently, a few empirical attempts have been made to explore the dynamics of strategic management in the SME ﬁelds (Berry, 1998; Beal, 2000). The above attempts have suggested several issues of signiﬁcance which merit further investigation. There are various arguments as to which type of strategy is the more effective; for example, should the strategy be formal and written or informal? While Mintzberg (1994) favours the adaptive ‘visionary’ approach. Porter (1998)

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and subsequently, Niv, Jehiel and Isaac (1998) and Beal (2000) believe that formal planning is more effective. Mintzberg (1994) has criticized the formal planning procedures of strategic management as being too rigid, because they may restrict or prevent the use of judgement and intuition. As discussed in Chapter 2, the role of senior managers and entrepreneurs in the development and implementation of strategies in SMEs is considerable. In this regard Beal (2000) indicated that, no strategic planning will be carried out in SMEs, unless the senior managers or entrepreneurs involved are aware of the importance of the process. Thus, the main objective of this research is to explore senior managers’ perceptions, awareness and attitudes towards the formulation and application of strategic management in British small and medium-sized enterprises in the electronic industry. In order to achieve the objectives of the study, the following questions have been posed in an attempt to highlight the importance of the role of senior managers in so far as strategic management is concerned in small and medium-sized ﬁrms in the British electronic and electronic industry. These are: 1. What are the senior managers’ perceptions and attitudes towards the strategic management process including: environmental scanning, strategy formulation, implementation and evaluation of strategy in small and mediumsized enterprises? 2. Which factors are associated with the effective process of strategy formulation and implementation in small and medium-sized enterprises and what are their likely impacts on ﬁrm performance? 3. What are the characteristics of a dynamic model of strategic management in SMEs and how can this assist the ﬁrms during the stages of formulation, implementation and evaluation of strategy? Based on the above questions, a conceptual framework for analysing senior managers’ perceptions of the planning and implementation of business strategies in small and medium-sized ﬁrms has been developed. It presents empirical evidence from the UK’s electronic and electrical industry to describe the strategic management processes which they employ. Research Hypotheses The details of the objectives of the study and research questions of this study are linked to research propositions and relevant hypotheses stated. These are: Proposition A To explore and examine CEOs’ perceptions of the importance of the strategic management process in SMEs. • H.1. CEOs of successful SMEs perceive employing a strategic management process as an important factor in running the business. Proposition B To explore the role of senior managers in the strategic management processes within small and medium enterprises.

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• •

H.2. There is a signiﬁcant relationship between senior managers’ age, work experiences, educational background and strategy formulation in SMEs. H.3. Strategic awareness of the senior managers in SMEs signiﬁcantly impacts upon ﬁrm performance.

Proposition C To examine the existence and nature of environmental analysis in developing business strategies in small and medium-sized enterprises. • H.4. CEOs of SMEs consider environmental analysis as a strategic activity when developing business strategies. • H.5. There is a signiﬁcant relationship between ﬁrm performance and having environmental scanning. Proposition D To explore and examine the factors associated with effective strategy formulation and implementation process in SMEs. • H.6. High performance ﬁrms use and put more emphasis on mission statement when developing their business strategies than do low performance ﬁrms. • H.7. There are signiﬁcant correlations between ﬁrm size, business life cycle, export activities, ﬁrm performance and employing formal strategic management techniques in SMEs. • H.8. There is a positive association between CEOs perceptions of the importance of human resources and their involvement in the process of strategy formulation and implementation. The Sample Small and medium-sized enterprises play a key role in generating employment, promoting innovation, creating competition, and generating economic wealth. The importance of SMEs to the economy depends on their capabilities to fulﬁl these roles. An effective company strategy for SMEs’ growth and success could be based either upon a technological or commercial innovation, or on a focused niche strategy with a differentiated product or service. Any growing company will face several problems as it proceeds through different phases of its life cycle. Rigorously deﬁning Small and Medium Enterprises (SME) has always been difﬁcult. The term SME covers a variety of ﬁrms (Hertz, 1982) and most writers use it rather loosely (Amboise and Muldowney, 1988). Researchers and other interested parties have used speciﬁc criteria to convey SME as a construct: value added, value of assets, annual sales, and number of employees. The latter two are most often used to delimit the category (Amboise and Muldowney, 1988). For a growing number of researchers and reporting organizations, the SME is generally considered to employ no more than 250 persons and to have sales of less than £50 million per annum. According to Gupta (1988) the SME is one which is independently owned and operated, and which is not dominant in its ﬁeld of operation. Quantitatively, the measure of sales revenue or number of employees are used as selection criteria, though a number of authors employ a variety of scales, and sectional differences among industries are sometimes recognized (Gupta, 1988).

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In a more recent review of the ﬁnancial assistance available to SME it is noted that, wide variations become apparent where quantitative parameters are applied to determine eligibility of small to medium sized ﬁrms: turnover limits range from £50,000 to £50 million; and the number of employees varies between 50 and 250 (Berry, 1998). In contrast, some scholars (Scott and Bruce, 1987; Gupta, 1988) suggest that, employing additional qualitative criteria can enhance the quantitative deﬁnition of SME. For instance, Scott and Bruce (1987) provided a qualitative deﬁnition of SME. They indicated that, an SME is one which has three characteristics: 1. management is independent; usually managers are also the owners; 2. capital is supplied and an individual or small group holds ownership; and 3. Area of operations is mainly local. Workers and owners are in one home community, but markets need not be located in the same community. For statistical purposes, the Department of Trade and Industry (DTI) usually use the following deﬁnitions: • • • •

micro ﬁrm: 0−9 employees small ﬁrm: 0−49 employees (includes micro) medium ﬁrm: 50−249 employees large ﬁrm: over 250 employees

However, in practice, schemes which are normally targeted at small ﬁrms, adopt a variety of working deﬁnitions depending on their particular objectives. In February 1996, the European Commission adopted a communication setting out a single deﬁnition of SMEs which has been illustrated in Table 3.2. The communication also includes a (non-binding) recommendation to Member States, the European Investment Bank and the European Investment Fund encouraging them to adopt the same deﬁnitions for their programmes. The communication permits them to use lower threshold ﬁgures, if desired. Therefore, by examining the general consensus within the literature and through the combination of quantitative Table 3.2

European Commission’s deﬁnition of SMEs

Criterion Maximum number of employees

Micro 9

Small

Medium 49

249

Maximum annual turnover

n/a

7 million euros 40 million euros

Maximum annual balance sheet total

n/a

5 million euros 27 million euros

Maximum % owned by one, or several enterprise(s) not satisfying the same criteria

n/a

Source: Small Business Services (2000)

25%

25%

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and qualitative approaches, the following deﬁnition for SME was developed which has been employed throughout this research. Small and medium-sized enterprises (SME) exhibit the following characteristics: • • •

Employing up to 250 employees. Having an annual turnover of up to £50 million. Management is independent and free from outside control in taking principal decisions.

Based on the above deﬁnition of SMEs, the ﬁnal sample of the research has been framed. The Dynamic SME Strategic Management Model The literature review shows that, a number of models have been proposed for strategic management in SMEs (Linneman, 1980; Green and Jones, 1982; Shuman and Seeger, 1986; Aram and Cowan, 1990; Foster, 1993; Berry, 1998; Beal, 2000). The bases for all of these models are similar in their employed concepts. Many of the concepts and techniques dealing with strategic management have been developed and used successfully by business ﬁrms. As managers attempt to better deal with their changing world, a ﬁrm generally evolves through four phases of strategic management consisting of basic ﬁnancial planning, forecast-based planning, externally orientated planning (strategic planning), and strategic management (Dyson and O’Brien, 1998). Strategic management itself consists of four basic elements: environmental scanning, strategy formulation, strategy implementation, and evaluation and control (Wheelen and Hunger, 1998). Environmental scanning is the monitoring, evaluating, and dissemination of information, regarding the external and internal environment, to key people within the corporation. Its purpose is to identify strategic factors, those external end internal elements that will determine the future of the corporation. It is argued by Wheelen and Hunger (1998) that the simplest way to conduct environmental scanning is through analysis of strengths, weakness, opportunities, and threats (SWOT). Strategy formulation is the development of long range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses. It includes deﬁning the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines. Strategy implementation is the process by which strategies are put into action through the development of programmes, budget, and procedures (Shrader, Taylor and Dalton, 1984; Phillips and Moutinho, 2000). The process might involve changes within the overall culture, structure, and management of the organization (Peel and Bridge, 1998). Finally, evaluation and control is the process by which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Although evaluation and control is the ﬁnal major element

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of strategic management, it also can pinpoint weaknesses in stages previously implemented and stimulate the entire process to begin again. In this study, for the conceptual framework the basic strategic management model, which has been developed by Wheelen and Hunger (1998) will be adapted to the SMEs in the UK electrical and electronic industry. However, it must be noted that the conceptual model developed by Wheelen and Hunger is more related to large organizations where the strategists may not be aware of the processes involved in operations and implementations. Moreover, in the case of SMEs, the CEOs as the ultimate strategists, are more likely to be involved in corporate as well as operational levels of the decision-making process. The dynamic strategic management model in SMEs, provides a structured format for directing the examination of SME strategies under the heading of awareness; environmental scanning; strategy formulation; and strategy implementation and control. Traditionally, the strategic management process models have attempted to answer six basic questions: what is our business? Where are we now? Where do we want to be? How are we going to get there? Which way is the best? And shall we do it? Most models of the strategic management process take a broad view of stakeholders, and are competitor-driven rather than customer-orientated. The dynamic SME’s strategic management as an extension of basic strategic management model, introduces, a customer value-based model of strategic management (see Figure 3.3). The dynamic SME strategic management model consists of three stages: 1. Awareness: understanding the strategic situation 2. Strategy formulation: choosing suitable strategies 3. Strategy implementation: making the chosen strategies happen. The dynamic SME strategic management model is based on the process by which small and medium enterprises determine their purposes, objectives and desired levels of attainment; decide upon actions for achieving those objectives in an appropriate time scale, and frequently in a changing environment; implement the actions; and assess progress and results. It is therefore suggested that, the strategic management process illustrated here in small and medium enterprises is proﬁled by a dynamic sequence of the following activities: • •

• •

•

Vision and development of a meaningful mission statement. External environment analysis: assessing opportunities and threats in terms of its competitors, suppliers, the economy, socio-political inﬂuences and technology in order to improve customer value. Internal environment analysis: assessing internal capabilities, strengths and weaknesses. An analysis of the present situation of the SME in terms of its products, markets, its distinctive competitive advantages, and the personal objectives of the owner-manager, and consequently, deﬁning the business in terms of mission, objectives, and values for meeting speciﬁed customer needs. Identifying key improvement factors and strategic issues of the company, which will inﬂuence the future direction of the SME.

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!

! $

! $ +

!

$ ! _ *

!

Figure 3.3

• • •

Dynamic strategic management model in entrepreneurial SMEs

Strategy formulation and deﬁning strategic alternatives in terms of objectives and grand strategies. Implementing change to enhance process and product by improving people capability. Monitoring improved customer value and business performance.

The basic questions referred to above are essentially aspects of a dynamic process. That is, they address the problem of deciding action priorities for companies that wish to prosper by developing and maintaining a competitive strategy by formulation, implementation, and evaluation of strategies that bring satisfaction to customers.

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Deﬁning Research Variables In order to assess the validity of a hypothesis it is necessary to develop measurement of the constituent concepts. This process is often referred to as operationalization of variables (Bryman and Cramer, 1992). In deed what is happening here is the translation of the concepts into variables. In this research different sets of variables are used as below, for more details about the deﬁnition of variables see data dictionary. Managerial and Corporate Characteristics The ﬁrst section of the questionnaire investigates the demographic characteristics of respondents. Respondents are asked about their age, sex, their status within the organization, experience, education, and functional background. Age is highly correlated with total work experience, organizational tenure and industry tenure. Hambrick and Mason (1984) maintained that ﬁrms with younger managers would be more inclined to pursue risky strategies than would ﬁrms with older managers. Education may be considered as indicative of one’s knowledge and skill base. As noted by Hambrick and Mason (1984), a manager who has one type of formal education can be expected to have developed different management skills and mental model with which he or she evaluates situations than a manager with another type of formal education. With regard to their functional background, it could be supposed that managers deﬁne strategies largely in terms of the goals and tasks in their functional area. External and Internal Environment Variables The second section of the questionnaire investigates the ﬁrms’ method for, and extent of environmental scanning. This examines both internal and external factors affecting the business in order to develop a picture of the managers’ awareness of the environment in which his or her ﬁrm operates. The external environment of the ﬁrm consists of two distinguishable societal environments and task environment variables. Societal environment includes economic, technological, socio-cultural, and political legal variables. While task environment includes industry force variables. In contrast, the internal environment of the ﬁrm consists of structure, culture and resource variables. To measure the variables, for example external environment, they will be measured using the ﬁve-point Likert scale (low to high). For instance, each respondent is asked to describe the extent to which the external variables drive the company’s strategy. Strategy Formulation Variables The formulation of strategies in the ﬁrm will be examined by direct reference to the variables such as mission, objectives, strategies and policies. The mission of a business is a statement of what the business stands for, what it hopes to achieve, its directions, aims and ambitions. Respondents are asked to indicate the main aim of their ﬁrm in terms of long term or short-term proﬁt, survival, market share, growth

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and rate of return. The emphasis of some of the other variables such as mission statement, long term plans, and annual goals on ﬁrm strategy will be measured by using a ﬁve point Likert scale (no emphasis, moderate emphasis, strong emphasis). Strategy Implementation and Control Variables The main variables in this case consist of strategy implementation through leadership, IT, HR, programmes, budget and procedures. The majority of the variables will be measured by a ﬁve-point Likert scale (seldom, sometimes, always). The main variables for measuring the performance and control of the ﬁrm’s strategy consist of ﬁnancial variables, customer perspective variables, and innovation variable. For example, the use of accounting and ﬁnancial variables such as ROI, is acknowledged to be important and used on a regular basis to good effect. Respondents are asked to identify customers feedback about the ﬁrm’s products or services. Finally, they will be asked how often the ﬁrm’s business strategy business strategy is reviewed. The Methods of Data Collection Data in social science in general, and in business and management studies in particular, are obtained in either formal or informal settings and involve either qualitative or quantitative formats. Robson (1997) argued that, a variety of combinations of these two settings for data collection results in three types of data collection: observation, interview and questionnaire survey. In this section the advantages and disadvantages of these three data collection methods are compared and in light of it the selected data collection method for this study is described. Observation Nachmias and Nachmias (1996) argued that, social science research is rooted in observation. A major advantage of observation as a technique is its directness. You do not ask people about their views, feelings, or attitudes; you watch what they do and listen to what they say (Robson, 1997). Moreover, data collected by observation may describe the observed phenomena as they occur in their natural setting. Other data collection methods introduce elements of artiﬁciality in to the research environment. Observational methods might also be used when persons are unwilling to express themselves verbally. This appropriateness does not imply that observation is an easy or trouble -free option. There is a major issue concerning the extent to which an observer affects the situation under observation. There is also the very practical problem with observation that is, it tends to be time consuming (Robson, 1997). Based on the literature, there are very few examples of using observation as a data collection method in management studies.

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Interview One of the most effective methods of gathering primary data in strategic management research is interview. The research interview has been deﬁned as ‘a two-person conversation initiated by the interviewer for the speciﬁc propose of obtaining research relevant information, and focused by him on content speciﬁed by research objectives of systematic description, prediction or explanation’ (Cohen and Manion, 1980, 244). Cohen and Manion argued that as a distinctive research technique, the interview might serve three purposes. First, it may be used as the principal means of gathering information having direct bearing on the research objectives. Second, it may be used to test hypotheses or as an explanatory device to help identify variables and relationships. Finally, the interview may be used in conjunction with other methods in a research undertaking (Cohen and Manion, 1980). In the case of opinion and attitude questions, especially if they are presented in an open-ended format, the interviewer has the opportunity to ensure that the respondent understands the questions. Interviews are increasingly being used in strategic management research through which in-depth information about people’s attitudes and values can be elicited. The researcher gains an impression of the respondent, is able to explore issues in greater depth and clarify concepts and deﬁnitions. There are more obvious advantages in the use of interview (Kohn and Dipboye, 1998). The process allows the interviewer to encourage the potential respondent to interpret complex questions, to correct the respondent’s misunderstandings and to keep track of the interviewee’s attention (Judd, Smith and Kidder, 1991). Both questionnaire and interview are powerful instruments in collecting primary data. While for collecting qualitative data in management research, the in-depth interview is a considerable instrument. There are four types of interview. Based on research objectives, the researcher uses the appropriate type of interview. In the standardized or structured interview the wording of questions and the order in which they are asked is the same from one interview to another. The piece of paper, which is held by the interviewer, is the ‘interview schedule’ and that word ‘schedule’ seems to convey the formality of this type of interview (Gilbert, 1993). However, Gilbert has argued that the second type of interview is the semi-standardized type; here the interviewer asks certain major questions the same way each time, but is free to alter their sequence and to probe for more information. The interviewer is thus able to adapt the research instrument to the level of comprehension and articulacy of the respondent, and to handle the fact that in responding to a question, people often also provide answers to questions we are going to ask later (1993, p. 136). The third type of interview is unstructured or informal interviewing. It has been indicated that (Malhotra, 1999), what differentiates this form of interview from the structured or semi-structured interview is its open-ended approach. Based on a list of topics, which the interviewer wishes respondents to discuss, questions are ﬂexible and phrased as the interviewer wishes. Context in this type of interview is very important. It is the most informal form of data collection and is often rich in content, which is why it is associated with a qualitative approach (Robson, 1997). Group interviewing is the fourth type of interview. Group interview have special value for those who want to

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assess how several people work out a common view, or the range of view, about some topic (Gilbert, 1993). In this type of interviewing the topic should be directed and it is up to the interviewer to maintain the focus so that the discussion does not deviate from the main topic. The researcher aims to encourage interaction in the group (Nachmias and Nachmias, 1996; Robson, 1997). Group interviewing allows the researcher to see how people interact when considering a topic, and how they react to disagreement. Generally, there is no single best way of collecting data. In this research as will be discussed later, a combination of the different types of interviews, but more specially semi-structured for gathering the data have been used. Personal interview: advantages and disadvantages The interview is a kind of conversation; a conversation with a purpose (Robson, 1997). Interviews carried out for research or enquiry purposes are a very commonly used approach, possibly in part because the interview appears to be a ﬂexible and adaptable way of ﬁnding things out. The main advantage of interview lies in the quality of data. Interviews are the best instruments when as small number of high quality and detailed responses are considered. Nachmias and Nachmias (1996) argued that, ﬂexibility in the questioning process; control of the interview situation; high response rate; and fuller or supplementary information are main advantages of interview. In contrast, higher cost; interviewer bias; and lack of anonymity are the main disadvantages of interview. Interviews offer more ﬂexibility to the interviewer to probe for quality information. Personal interviews have a better chance of acceptance returns, with a low respondents-refusal rate. The sample is less distorted and a much wider range of questions can be covered (Gorton and Dool, 1983; Curran and Blackburn, 2001). Robson (1997) argued that, face-to-face interviews offer the possibility of modifying one’s line of enquiry, following up interesting responses and investigating underlying motives in a way those postal and other self-administrated questionnaires cannot. In contrast, interviewing is time consuming. In addition in some ﬁelds it appears to be increasingly difﬁcult to obtain co-operation from potential interviewees (Robson, 1997). Interview is an unusual method in that it involves the gathering of date through direct verbal interaction between individuals. In this sense, it differs widely from the questionnaire. All tools of research have their own strengths and weaknesses. It is commonly agreed that interviewing is time consuming and costly, nevertheless, the process usually produces a good response rate (Judd, Smith and Kidder, 1991; Robson, 1997). It is held that interviewing allows ﬂexibility and adaptability in the process of eliciting information from people (Robson, 1997). Although the interview allows more ﬂexibility, at the same time such ﬂexibility can lead to bias in the way questions are asked, prompts given, and answers recorded. Judd, Smith and Kidder (1991), argued that the source of bias lies in the personalities of both the interviewer and interviewee. The problem highlights the difﬁculties in ensuring validity and reliability in the interviewing process.

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Questionnaire It has been argued that, there are two main survey data collection models: questionnaire and interview. The main purpose of the research questionnaire is to obtain information that cannot be easily observed or that is not already available in written or computerized form. Evidence from the questionnaire survey is then used for one or more of the following purposes − description, explanation, hypothesis testing. Remenyi et al. (1998) argued that, the type of information sought when surveying individuals or objects, such as ﬁrms, usually include evidence on demographic and socio-economic variables. In addition, depending on the study, evidence may be sought on opinions or beliefs related to behaviours, experiences, activities and attitudes (Remenyi et al., 1998). The foundation of all questionnaires is the question. Nachmias and Nachmias (1996) argued that the questionnaire must translate the research objectives into speciﬁc questions; answers to such questions will provide the data for hypotheses testing. The question must also motivate the respondents to provide the information being sought. The major aspects of the questionnaire, which have been considered in formulating the questions of the postal questionnaire, consist of its content, measurement considerations, structure, and administration. The mail questionnaire: advantages and disadvantages The mail questionnaire is an impersonal survey method. Under certain conditions and for a number of reasons, an impersonal method of data collection can be useful. Nachmias and Nachmias (1996) discussed the main advantages of the mail survey as follows: •

•

•

•

•

Low cost. Economy is one of the most obvious appeals of mail questionnaire. The mail questionnaire does not require a trained staff of interviewers; all it entails is the cost of planning, sampling, duplicating, mailing, and providing stamped self-addressed envelopes for the returns. Reduction in biasing error. The mail questionnaire reduces biasing error that might result from the personal characteristics of interviewers and variability in their skills. Greater anonymity. The absence of an interviewer also provides greater anonymity. The assurance of anonymity with mail questionnaires is especially helpful when the survey deals with a sensitive issue. On such matters, a mail survey may elicit a higher response rate than a personal interview. Considered answers and consultations. Mail questionnaires are also preferable when questions demand a considered answer or if an answer requires the consultation of personal documents or other people. Accessibility. Finally, the mail questionnaire permits wide geographic contact at minimal cost.

Although the mail questionnaire has its advantages, it also has some disadvantages in comparison with other survey methods. Nachmias and Nachmias (1996) listed the disadvantages of the mail survey as follows:

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•

•

•

•

Required simple questions. The mail questionnaire can be used when the questions are straightforward enough to be comprehended solely on the basis of printed instructions and deﬁnitions. No opportunity for probing. The researchers have no opportunity to probe beyond the given answer, to clarify ambiguous answers, or to appraise the non-verbal behaviour of respondents. No control over who ﬁlls out the questionnaire. With a mail questionnaire, the researcher has no control over the respondent’s environment; hence they cannot be sure that the appropriate person completes the questionnaire. Low response rate. Perhaps the most serious disadvantage of mail questionnaire is that it is often difﬁcult to obtain an adequate response rate. Nachmias and Nachmias indicated that, ‘the typical response rate for a personal interview is about 95 percent, whereas the response rate for a mail survey is between 20 and 40 percent’ (1996, p. 226).

From the listed disadvantages of the mail survey, the low response rate is crucial. In administrating the survey, it is important to consider the factors affecting the response rate. The difﬁculty of securing an acceptable response rate to mail questionnaires requires the use of various strategies that can be taken to increase the response rate. Three factors are important. First, the sponsorship of a questionnaire has a signiﬁcant effect in motivating a respondent to ﬁll it out and return it. Therefore, information on sponsorship must be included usually in the cover letter accompanying the questionnaire. Secondly, the researcher must be appeal to the respondents and persuade them that they should participate by ﬁlling out the questionnaire and mailing them back. In this case providing some facilities such as self addressed and stamped envelopes will be very useful. Selection of Data Collection Techniques As discussed earlier, data collection methods have been grouped into three categories consisting of observational methods, questionnaire surveys and interview (Nachmias and Nachmias, 1996). This study required the collection of both quantitative and qualitative data that would facilitate comparison and hypothesis testing. The data had to be collected from a population of 508 small and medium sized companies in the electronic industry all over the UK. Therefore, it was suggested that a mail questionnaire survey was the most appropriate data collection method (Curran and Blackburn, 2001). The mail questionnaire is the main research instrument in this study. The survey as the data collection method was selected when it became apparent that this method was superior, for our requirements, when compared with the other two methods. Observational methods are suitable where the phenomena of interest can be observed, relevant events occur within a reasonable time and past events are irrelevant. In this research many of variables could not be observed. So this made the observational method inadequate for the research. However, although, the main data collection method was the survey method, during the follow up interviews the

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researcher did make some observations in the companies visited. In this research, where secondary data such as the annual reports of the companies, company documents, or published materials, were available, they also provided additional data. The nature of data in strategic management research includes qualitative and quantitative. The collection of qualitative evidence usually involves interviews, which may be structured to a greater or lesser degree, in order to collect complex information about a particular aspect of the subject, for example, about how ﬁrms formulate and implement a business strategy (Remenyi et al., 1998). Because research into strategic issues requires the collection of complex evidence concerning ‘why?’, ‘how?’, and ‘who?’, simple survey techniques are not appropriate and the researcher has to engage in a more sophisticated research strategy. It has been emphasized that, qualitative and quantitative methods could be combined to reinforce each other in the same research project. For quantitative research it is usually obvious what evidence is required and this evidence may usually be collected within a tight structure (Remenyi et al., 1998). Thus, in social science in general and strategic management research in particular, evidence collection often involves the use of questionnaire. The most important and main reasons for selecting the mail survey as the main research instrument in this study can be summarized as follows: •

•

•

•

First, abundant information can be gathered through a structured questionnaire. Meanwhile, the data obtained can have a moderate degree of complexity, if the questionnaire is of appropriate design. Since the required information in this research not only embodies the issues of planning and implementation of business strategies in SMEs, but also includes several organization characteristics, this tool could be used to gather information in an effective way. Secondly, the topic in this research itself is sensitive. Other methods may encounter a lot of problems during the data collection process and fail to gather enough good quality information. In addition, accuracy of data can be secured and interview bias can controlled by using mail survey. Thirdly, because of the large sample size, the information gathering process can be very efﬁcient in a limited time. Accordingly, because of the nation wide focus of the study, the mail questionnaire was the most efﬁcient instrument. Finally, owing to ﬁnancial constraints, the mail questionnaire was the most appropriate and economical instrument to conduct the survey.

Questionnaire Construction A questionnaire is a formalized set of questions for obtaining information from respondents. Regardless of the form of administration, a questionnaire is characterized by three speciﬁc objectives (Malhotra, 1999). First, it must translate the information needed into a set of speciﬁc questions that the respondents can and will answer. Second, a questionnaire must uplift, motivate and encourage the respondent to become involved in the interview, to cooperate and to complete the questionnaire.

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Third, a questionnaire can be a potential source of response error, therefore the questions should be constructed in such a way as to minimize response error. In the present research the questionnaire was structured in six steps. First step the was decision about what information was required. It is useful list all the items about which information is required. Based on the conceptual framework of the research, the subject area of discussion is mainly concerned with the following main notes: • •

• • • • • •

Strategic management process including formulation and implementation, in the corporate, business, and functional levels of the organization. Senior managers’ attitudes, perception, and contribution to strategic planning and implementation of business strategies in small and medium-sized enterprises. Views of senior managers on the importance of environmental scanning for strategic management in SMEs. Importance of strategic management in increasing organizational performance. The requirements of managerial effectiveness and improved performance. Management style and its relation to developing corporate strategy. Criterion of managerial success and how it can be achieved. Nature of competitive advantages, core capabilities, competition, decision making and industry strengths analysis in SMEs.

Second step was to consider data collection alternatives. It is necessary to answer the question, is a survey research the best way of obtaining the information? In response to this question, and since in this research, both the primary qualitative and quantitative data were needed, then it was concluded that using a mail questionnaire and personal interview would be useful. Third Step was the decision about the type of interview and the questions schedule. In management research as Bell (1993) has argued, once the researcher has decided what he or she needs to know, a decision will have to be made about the type of interview. A structured interview will produce structured responses, an open-ended interview will produce a wide range of responses. There is no single best way of collecting data; the method chosen depends on the nature of the research questions (Sapsford and Jupp, 1996). In summary the interview schedule consisted of both close-ended and open-ended questions. The fourth step was reﬁning the questions and considering how the questions would be analysed. Preparing an interview schedule or guide was the ﬁfth step in structuring the questionnaire. This consists of considering the order of questions and preparing prompts in case the respondents do not provide essential information freely. Finally, in the six step of structuring the questionnaire, revising the questionnaire, and avoiding bias were necessary. As discussed earlier, the foundation of all questionnaires is the question. Survey questions may concern facts, opinions, attitudes, respondent’s motivation, and their level of familiarity with a certain subject. Most questions however, can be classiﬁed

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into either of two general categories: factual questions and questions about subjective experience (Nachmias and Nachmias, 1996). Factual questions are designed to elicit objective information from the respondents regarding their background, environments, habits, and the like. The factual questions, which have been asked in the questionnaire, include such items as gender, age, education, experience, and organizational position. To increase accuracy the researcher has taken several steps, including encouraging respondents to answer the questions, asking more than one question about certain matters, repeating some of the questions, and making respondents feel comfortable when asking about events that they might found embarrassing. In contrast, questions about subjective experiences involves the respondent’s beliefs, feelings, opinions and attitudes that can incline a person to act or react in a certain manner when confronted with certain stimuli (Singleton et al., 1988). The main body of questionnaire investigated senior managers attitudes and perceptions about the formulation and implementation of strategies in business and at the functional level of manufacturing organizations. Although the answers to opinion and attitude questions were more sensitive to changes in wording, emphasis and sequence, than answer to factual questions, different methods and scaling of the questions such as Likert scale have been used to increase validity of questions. Importantly, types of questions were considered as a critical matter in questionnaire design. Measurement Consideration Questionnaire responses can be qualiﬁed by assigning numbers to the responses according to a given set of rules. This is what is understood by measurement (Cohen and Holliday, 1982). In this regard, operationalization of a concept refers to the whole process of selecting a working deﬁnition, choosing a unit of analysis, deciding on the variable name, and ﬁnally deciding on a level of measurement for that variable. It has been argued (Miller, 1991; Malhotra, 1999) that, the level of measurement describes the degree of accuracy and detail in a variable’s possible value. Measurement can be made at three levels: nominal, ordinal, and continuous (interval and ratio). Table 3.3 illustrates some examples of the current research variables which have been measured in the three levels. The ﬁrst level of measurement is nominal level. Nominal scales, which are the least sophisticated level of measurement, are used to place variables into categories with respect to some characteristics. In this research some of variables such as gender and ﬁrm activity were measured by nominal scale. For example, numbers were assigned to categories, ‘1’ for male and ‘2’ for female. Also respondents were asked to indicate having written business plan or not by indicating ‘1’ for yes and ‘2’ for no. The second level of data measurement is ordinal level. More importantly, ordinal scales were used when the respondents were asked for responses in the form of rank ordering. In ordinal scale while the evidence is put into categories, the numbers assigned indicate the ordering of the categories. However, while there is order in the numbers assigned, the intervals between the numbers have no meaning (Remenyi et al., 1998). For example, respondents were asked to rate the degree of emphasis

92

Table 3.3

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Measurement level of the research variables, some examples

V.name SPSS

Variable Label

Demb

Respondents job title

Nominal

Demc Demd Deme Demh

Age of respondents Respondents sex Respondents work experience Respondents formal management training Employees of the ﬁrm Turnover of the ﬁrm

Continuous Nominal Continuous Nominal

Demi Demj

Measurement Value Label

Ecoes15a

Impact of economic trends on Ordinal business strategy

Enscan8b

Environmental scanning

Ordinal

Forwrbp1 Lbpprep2

Formal written business plan Period of long-term business plan Reviewing long-term business plan Emphasis on mission statement in strategic planning

Nominal Continuous

Total number of employees Total amount of the ﬁrm in last year =1 poor, =2 below average, =3 average, =4 above average, =5 outstanding =1 not important, =2 limited importance, =3 important, =4 very important, =5 essential =1 yes, =2 no In months

Continuous

In months

Ordinal

=1 no emphasis, =2 weak emphasis, =3 moderate emphasis, =4 strong emphasis, =5 very strong emphasis

Lbprrevw3 Missp10a

Continuous Continuous

=1 managing director, =2 ﬁnancial manager, 3= business manager In years =1 male, =2 female In years =1 yes, =2 no

for each of following indicators within their organizations: mission statement, short term plans, long term plans, competitor analysis. Each item was measured on a 5-point Likert scale. The third level of measurement level is continuous level. The third and ﬁnal level of measurement is called the continuous, ratio, or interval scale. Remenyi et al. (1998) argued that, ‘rating scales are strictly speaking ordinal. However, in practice, especially in the management area, these are treated as being measured at the interval level’ (Remenyi et al., 1998, 153). Evidence based on interval scales can be analysed by virtually the full range of statistical procedures such as the mean, standard deviation, and Pearson’s correlation coefﬁcient. In practice, although the survey generally makes most use of the evidence at the ordinal level, some of the variables were measured in continuous scales. Variables such as the number of employees of the ﬁrm, amount of turnover of the ﬁrm and duration of the business plan preparation are examples of the variables which were measured in continuous scale.

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The Process of Survey Questionnaire Data were collected via mail surveys from 508 senior managers in the UK electronic manufacturing small and medium enterprises. The ﬁrst phase of primary research involved the survey of the whole population of small and medium-sized enterprises in the electronic industry by means of mail questionnaire. Data were collected from each ﬁrm’s managing director since they were viewed as the most accurate source for collecting the information required and for gauging data relating to the ﬁrm’s strategic management processes. Questionnaires were sent out to all 508 companies, accompanied by a covering letter, addressed by name, to the managing director of each company. The personalized cover letter explained the purpose of the study and provided assurances regarding the conﬁdentiality of collected data. Managing directors were urged to personally participate in the survey. Participants in the survey were offered a summary analysis of the research. In order to minimize response bias, the participants were also provided with pre-addressed envelopes to enable them to return the completed questionnaires directly to the researchers without any risk of perusal within the ﬁrms. Potential respondents were assured that, no individual company data would be published and that all data generated would be aggregated. Thus, respondents were assured of the conﬁdentiality of all data collected. The ﬁrst mailing generated 74 replies and a follow up letter together with another copy of the questionnaire was sent out two months after the ﬁrst mailing to nonrespondent companies in order to encourage an increased level of response. This second mailing generated a further 58 responses resulting in a total of 132 (27 per cent) completed questionnaires. In addition to the return of completed questionnaires, the survey generated the following alternative responses; 20 letters were returned by the Post Ofﬁce, indicating that the companies targeted were in liquidation, 15 questionnaires were returned by companies indicating that, they were either unwilling to provide the required data, because of the company’s policy involving such surveys, or that they did not engage in strategic management activities and therefore perceived that they were not suitable companies to take part in the survey. Companies indicating that, the managing directors targeted were no longer with then returned a further 20 questionnaires. Therefore, out of the original 508 companies surveyed, 20 companies were discounted from original sample. From this sample of 488 companies a total of 132 (27 per cent) responses were generated. It is important to indicate that, a comparison of early-responding ﬁrms (those that responded before the follow-up letter was sent) and those that responded after the follow-up letter was sent showed that there was difference in terms of the number of employees, ﬁrms turnover, or any of the key parameters under study between the two groups and thus they were subjected to the same analytical treatment. The Process of Research Interviews As mentioned earlier, interviews are very time-consuming. Then, there is the use of the extra time needed to consider what has been said during the interview and

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the notes taken, to extend and clarify points that may have been raised. The validity of the data collected by the interview depends upon the effective establishment of a particular kind of social relationship between the interviewer and interviewee. Ackroyd and Hughes (1992) argued that the task of the interviewer is to obtain information, often a highly personal and private nature, from a respondent who is a stranger with little or no obligation to spend time and effort answering questions. In order to select the sub-sample of managing directors for conducting the personal interviews, the systematic sampling method was used. As Nachmias and Nachmias (1996) argued, systematic sampling consists of selecting every Kth sampling unit of the population after the ﬁrst sampling unit is selected at random from the total of sampling units. Systematic sampling is more convenient than simple random sampling. Using the systematic sampling form, from the 60 managing directors (K = 5) who enclosed their business cards with the mail questionnaire and indicated that they were interested in being involved in the research, a total of 12 sub-sample were selected and interviewed. Based on the managers managerial level, their personality and the organizational culture, the initial contact is especially crucial. Obviously, if this fails there is no interview. The interviewer must give the respondents sufﬁcient information about who the interviewer is, how the respondent came to be selected, what the questions will be about, assurances must be given as to conﬁdentiality, and permission sought for the interview to take place (Ackroyd and Hughes, 1992). In this research the appointment for interview was made through personal contact, and formal and informal channels. All interviews were individually conducted and started, ﬁrst by brieﬁng the interviewee about the background, importance, and objectives of the research for the development of senior managers and their organizations. The second phase in the process of interview was to establish a suitably relaxed and encouraging relationship between the interviewer and respondent. With this in mind the researcher communicated trust to the respondents and used small talk to ease the situation a little before embarking on the interviews proper. Since the creation of an atmosphere of mutual respect and trust is essential for a successful interview, the interviewees were then assured of the conﬁdentiality of the entire discussion. During the interviews since the interview contains signiﬁcant nonstandardized items, the researcher aimed to place the respondents at ease so that they felt free to talk at some length. The ﬁnal stage was bringing the interview to a close and disengaging from the scene. This can often be harder than it looks, especially if the relationship has been a rewarding one for the respondent (Ackroyd and Hughes, 1992). Data Analysis In order to analyse the data and consequently test the hypothesis, the collected data preliminarily was summarized using statistical graphs such as bar charts and histograms. In addition, various descriptive statistics including means, medians, modes, standard deviations, coefﬁcient of skewness and kurtosis were calculated.

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The main reason of such analysis was to get a clear picture of how the different variables were distributed. The general picture which has been obtained was one of skewed and non-normal distributions. In order to cross check these observations regarding the distributions the Kolmogorove-Smirnove goodness-of-ﬁt test was used on the data to check for normality. The result of the test conﬁrmed that the majority of variables were not normally distributed. Accordingly, the ﬁnding had a big inﬂuence on the choice of statistical techniques that were used for testing the hypotheses. Regarding the reliability of the data, reliability analysis on measurements has been carried out. Reliability refers to the extent to which a scale produces consistent results if measurement are made repeatedly (Wilson, 1995). The coefﬁcient alpha is the average of all possible split-half coefﬁcients resulting from different ways of splitting the scale item (Malhotra, 1999; Burns, 2000). Churchill and Peter (1984) argued that, this coefﬁcient varies from 0 to 1, and a value of 0.6 or less generally indicates unsatisfactory internal consistency reliability. In saying this, they implied that, value of alpha above 0.6 were generally acceptable. In this research the coefﬁcient alpha computed for the various variables. The value of alpha ranged from 0.65 to 0.89. This coefﬁcient gave an indication of the internal consistency and therefore stability of measurement generated by research scales and indicated that, the data collected were quiet reliable. Parametric or Non-Parametric Analysis One of the unresolved issues in statistics is the question of when parametric rather than non-parametric tests should be used. There is an ongoing debate in research over the use of either parametric or non-parametric statistical analysis techniques. Siegel and Castellan (1988) argued that, a parametric statistical test speciﬁes certain conditions about the distribution of responses in the population from which the research sample was drawn. Typically, parametric techniques assume the sample population has a probability distribution which is approximately normal. Since these conditions are not ordinarily tested, they are merely assumed to hold and thus the meaningfulness of the results of a parametric test depends on the validity of these underlying assumptions. Accordingly Cramer (1994) and Burns (2000) argued that, parametric tests should only be applied when the data fulﬁl the following three conditions: • • •

The variables are measured with an equal interval or ratio scale; and the samples are drawn from populations. Whose variances are equal or homogeneous. Whose distributions are normal.

These assumptions should hold true if parametric techniques are to be used. Violation of any of them means such tests should not be used. Instead, non-parametric techniques should be used. Cramer (1994) argued that, where the above assumptions are violated, non-parametric tests are almost as powerful as their parametric counterparts in detecting population differences. In such cases, it is advisable to

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use non-parametric tests. By and large, a non-parametric statistical test is based on a model that speciﬁes only very general conditions and none regarding the speciﬁc form of the distribution from which the sample was drawn. Unlike parametric methods, non-parametric methods may be applied appropriately to data measured in an ordinal scale, and others to data in a nominal or categorical scale (Siegel and Castellan, 1988) where data are inherently in ranks or categories, they can not be treated by parametric methods (Cramer, 1994). In this research most of data captured by the postal survey were measured on nominal, categorical, and ordinal scales and were not normally distributed. Statistical Tests Used Hickey (1986) has developed the decision tree diagrams, which one can use when deciding upon the appropriate statistical tests to use. The choices to be made are based on the purpose of analysis, the number of samples being handled, the type of data available and the number of variables tested at a time. Similarly, Siegel and Castellan (1988) and Burns (2000) have developed tables of most non-parametric tests and conditions under which they can be used. Generally, in this research in order to analyse the data, parametric as well as non-parametric tests have been used. Table 3.4 provides the classiﬁcation of the statistical test in terms of the level of the data measurement and research design. One-way analysis of variance technique ANOVA has been employed for the analysis of the data, when the data are measured in interval level, and an experimental design between subjects applied. In order to investigate the association between variables, the correlation analysis, Spearman rank order correlation for non-categorical data, and Pearson correlation for categorical data, have been used. The Spearman’s rank orders correlation coefﬁcient were the ones calculated since the data were mainly ordinal and exhibited skewed distributions. In order to investigate the association between two samples in nominal level, Chi-square test

Table 3.4 Type of Data

Data analysis plan: Employed statistical tests Experimental Design (Between Subjects)

Experimental Design (Within Subjects)

Two Samples Nominal Ordinal Interval

Nominal Ordinal Interval

McNemar test Wilcoxon Mann-Whiteny Test Wilcoxon signed ranks test Independent Samples T test Paired samples t-test Three Samples Chi-square test Cochran’s Q test Kruskal-Willis K-Sample Test Friedman Test One way ANOVA Repeated measures ANOVA

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has been used. While for ordinal variables the Mann-Whittney U test was used for detecting signiﬁcant differences. Consequently, independent sample T tests have been applied to the data, which was measured in interval levels. For investigating the relationship between variables in the case of more than three samples, Chi-square for nominal data, Kruskal-Wallis K-sample test for ordinal data, and ANOVA for interval data have been applied. Summary and Conclusion This chapter deﬁnes the conceptual framework of the study and discusses the ways of creating concepts, variables, hypotheses, and models in strategic management in small and medium-sized ﬁrms. An attempt has been made to synthesize the key themes apparent within the existing literature reviewed in Chapter 2. It presents a framework for analysing managers’ attitudes and perceptions to strategic management, in British small and medium enterprises using empirical research methodology. This chapter has reviewed a number of alternative approaches to the design of an appropriate methodology to meet the speciﬁc objectives of this study including qualitative and quantitative research methodologies, research process, data collection methods, and data analysis techniques. It has been concluded that, the objectives of this research require that rich, qualitative and quantitative data be collected; thus a methodology, which combines qualitative and quantitative approaches, was deemed appropriate. Management researchers use a wide range of techniques to collect their primary data. In order to gather the data, a combination of both mail questionnaire and personal interview survey techniques was judged to provide the most comprehensive means of capturing exploratory, descriptive and explanatory data pertinent to the stated research objectives. However, because of the nation wide focus of the study, mail questionnaire was the main survey instrument in this research. Regarding data analysis the data were analysed using the SPSS package. Through preliminary analysis, it was found that, a portion of the data violated several of the assumptions underlying parametric analysis. Therefore, non-parametric analyses as well as parametric analysis has been used. Apart from that, in order to support the ﬁndings of the quantitative analysis, the research beneﬁted from the results of qualitative analysis. References Ackroyd, S. and Hughes, J. (1992), Data Collection in Context, 2nd edn (Harlow, Essex: Longman). Amboise, G. and Muldowney, M. (1988), ‘Management Theory for Small Business: Attempts and Requirements’, Academy of Management Review, 13(2), 226−240. Analoui, F. (2000), ‘What Motivates Senior Managers?’ ‘The Case of Romania’, Journal of Managerial Psychology, 15(4), 324−326. Andrews, K. (1971), ‘The Concept of Corporate Strategy’, (Homewood, IL: Dow Jones-Irwin Books). Ansoff, H.I. (1965), Corporate Strategy (New York: McGraw-Hill).

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Kudla, R.J. (1980), ‘The Effects of Strategic Planning on Common Stock Returns’, Academy of Management Journal, 23(1), 5−20. Langer, J. (1999), ‘15 Myths of Qualitative Research: It’s Conventional, but is it Wisdom?’ Marketing News, 33(5), 13−14. Learned, E.P., Christensen, C.R., Andrews, K. and Guth, W.D. (1969), Business Policy: Text and Cases, (Homewood, IL: Richard D. Irwin). Linneman, R.E. (1980), Shirt-sleeve Approach to Long Range Planning for the Smaller, Growing (Corporations, NJ: Prentice-Hall Books). Malhotra, N.K. (1999), Marketing Research: An Applied Orientation, 3rd edn (Upper Saddle River, New Jersey: Prentice-Hall Books Inc.). Marshal, C. (1985), ‘Approximate Criteria of Trustworthiness and Goodness for Qualitative Research’, Quality and Quantity, 19, 353−373. May, T. (1997), Social Research: Issues, Methods and Process, 2nd edn (Buckingham: Open University Press). McKiernan, P. and Morris, C. (1995), ‘Strategic Planning and Financial Performance in UK SMEs: Does Formality Matter?’, British Journal of Management, 5, 31−41. McNeill, P. (1990), Research Methods (London: Routledge). Miller, C.C. and Cardinal, L.B. (1994), ‘Strategic Planning and Firm Performance: A Synthesis of More than Two Decades’, Academy of Management Journal, 37, 1649−1665. Miller, D.C. (1991), Handbook of Research Design and Social Measurement, 5th edn (London: SAGA Publications). Mintzberg, H. (1994), ‘The Fall and Rise of Strategic Planning’, Harvard Business Review, 72(1), 107−114. Nachmias, C.F. and Nachmias, D. (1996), Research Methods in Social Science (forth ed) (London: Edward, Arnold). Niv, A., Jehiel, Z. and Isaac, M. (1998), ‘Environmental Scanning and Information Systems in Relation to Success in Introducing New Products’, Information and Management, 33(4), 201−211. Pearce, J., Freeman, E. and Robinson, R. (1987), ‘The Tenuous Link between Formal Strategic Planning and Financial Performance’, Academy of Management Review, 12, 658−675. Peel, M.J. and Bridge, J. (1998), ‘How Planning and Capital Budgeting Improve SME Performance’, Long Range Planning, 31(6), 848−856. Phillips, P.A. and Moutinho, L. (2000), ‘The Strategic Planning Index: A Tool for Measuring Strategic Planning Effectiveness’, Journal of Travel Research, 38(4), 369−370. Porter, M. (1998), On Competition (Boston: Harvard Business School Publishing). Remenyi, D., Williams, B., Money, A. and Swartz, E. (1998), Doing Research in Business, and Management: An Introduction to Process and Method (London: SAGE Publications). Rhyne, L.C. (1986), ‘The Relationship of Strategic Planning to Company Performance’, Strategic Management Journal, 7, 423−436. Robson, C. (1997), Real World Research: A Resource for Social Scientists and Practitioner-Researcher (Oxford: Blackwell).

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Chapter 4

Data Analysis and Major Findings Introduction The discussion on the methodology adopted for this empirical research, was provided in Chapter 3. It has been explained that the main method of data collection in this research was the postal survey. In this chapter the data generated through postal survey will be analysed, explored and discussed further. The aim of this chapter is to present the ﬁndings from the data analysis carried out for this empirical research. Furthermore, in Chapters 5 and 6, these ﬁndings will be interpreted in relation to the research questions of the study and will be discussed with respect to the existing theories which were reviewed in the preceding chapters. In order to analyse the data and consequently discuss the results, the collected data were summarized using descriptive statistics. This type of data analysis gives a clear picture of the distribution of the data and consequently helps to select appropriate statistical tests for testing the hypotheses. In this chapter, ﬁrst the ﬁrm details and demographic proﬁle of the respondents will be explored. Second the data regarding the strategic planning activities in small and medium-sized enterprises will be analysed. Third the discussion will continue with respect to environmental analysis in the studied ﬁrms. Strategy implementation, organizational factors and ﬁrm performance will be discussed in the fourth section. Finally, the chapter will end with a conclusion and summary. Company Details Let’s start analysis of the data with details of the studied ﬁrms and demographic proﬁle of the respondents. Of the 508 questionnaires distributed, 132 completed questionnaires were returned from small and medium-sized enterprises. This accounted for a response rate of 27 per cent. Typically, the studied companies were operating in the high tech electronic and electrical industry. The size of the companies varied from small to medium sized based on two criteria: the number of employees and the amount of annual turnover. As it has been discussed in the sampling Section (5.8.1) that the small and medium sized companies are here deﬁned as those which have less than 250 employees and have an annual turnover of up to £50 million. Figure 4.1 provides a summary of the number of employees groups (Mean = 2.24, Std = 1.35) in the sample ﬁrms. As shown in Figure 4.1, 40.9 per cent (n = 54) of the companies studied have less than 50 employees. Thirty-two (24.2 per cent) employed 51−100 employees. Only 19 of the studied ﬁrms had between 101 and 150 employees, 14 (10.6 per cent)

Strategy Formulation in Entrepreneurial Firms

104

X\^ XX^ X^

X\\ XX\\ X\XX\ XX\\ \X\

X^

^ Figure 4.1

Demographic proﬁle of respondents

companies were located in the employees group 151 to 200, and ﬁnally, 13 (9.8 per cent) companies were classiﬁed in the employees group of between 201 and 250. Regarding the companies founders, the result of the data analysis shows that the majority of the companies (n = 93, 70 per cent) were established by more than two founders, whilst only 30 per cent of the studied companies (n = 39) were established by one or two founders. This result also reﬂects the ﬁndings of Cooper (1973) and Berry (1998) who concluded from their empirical research that, successful small businesses were founded by a team of two to ﬁve people rather than an individual. As explained the ﬁrm size was measured by the amount of their annual turnover and the number of employees (see Figure 4.2). 0LOOLRQ3RXQGV

Figure 4.2

RUOHVV

WR

WR

Annual turnover of studied ﬁrms

WR

WR

Data Analysis and Major Findings

105

The amount of annual turnover of the studied ﬁrms (Mean = 1.95, Std. = 1.14) varied from £1.25 to £49.6 million. As illustrated in Figure 4.2, a total number of 63 (47.7 per cent) companies studied had a turnover level of up to £10 million and only 25.8 per cent (n = 34) had a turnover of up to £20 million. Some 17 companies (12.9 per cent) had an annual turnover of between £20 and £29 million. The ﬁndings also show that, 14 of the companies studied had a turnover of between £30 and £39 million for a response rate of 10.9 per cent, whilst the remainder ranged between £40 million and less than £50 million (3 per cent). Managerial Characteristics of the Respondents Building on the premises of strategy research, researchers argue that observable executive characteristics serve as indicators of the mental models executives use during strategy formulation and implementation. In this section the managerial and personal characteristics of the senior managers of the studied companies such as age, gender, management training, educational backgrounds, and functional background are reported. Table 4.1 summarizes the demographic proﬁle of the respondents involved. Table 4.1

Demographic proﬁle of the respondents (percent)

Firm size (number of employees)

%

Micro-enterprises Small-enterprises Medium-enterprises total Age of the respondents

7 48 45 100 %

30 or less to 39 40 to 49 50 to 59 or more

29.5 46.2 24.2

Respondent’s sex Male Female

% 92.4 7.6

Respondent’s years of work experiences 9 or less 10-19 20-29 30-39

% 27.3 47.7 16.7 5.3

Source: Survey questionnaire

Annual turnover of the ﬁrm (Million Pounds) 9 or less 10-19 20-29 30-39 40-<50 Respondent’s educational level Up to A level Bachelor degree Master degree Ph.D.

Respondent’s educational background Engineering Management Science Technology General

% 47.7 25.8 12.9 10.9 3 % 50.8 22.7 22.12 5.3

% 34 26 11 8 21

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106

Respondents’ Age It has been argued that, the age of the senior managers is highly correlated with their total work experience, and organizational and industry tenure. For instance, it has been proposed that, older executives are more committed to the status quo than are the younger executives. Kakabadse (1999) also argues that younger does not [necessarily] mean better. The analysis of the data show that the respondents age (Mean = 44, Std = 8) ranged from minimum 32 to maximum 65 years old. Figure 4.3 provides the classiﬁcation of the respondents age groups. The respondents were categorized into three groups: group one (under 30−39 years old), group two (40−49 years old), and group three (over 50). Thirty-nine of the respondents (29.5 per cent) reported their age to be between under 30 and 39 years old. The majority of the respondents (n = 61, 46.2 per cent) were between 40 and 49 years old and the remainder (n = 32, 24.2 per cent) reported their age as being 50 or older. Work Experiences As mentioned early, age is highly correlated to the work experiences of the executives. In order to examine this proposition, in this research the researchers measured the work experiences of the CEOs as well as their age. The respondents’ average number of years work experience (Mean = 15.91, Std = 7.99) was 34 years. In other words, the minimum years of respondents’ work experience was 8 years, while the maximum number of years work experience was 42. The total work experiences of the respondents were categorized into ﬁve groups (see Figure 4.4.). The ﬁndings of the research show that 36 of the respondents (27.3 per cent) had less than 10 years work experience, whilst many of them (n = 63, 47.7 per cent) fall

Figure 4.3

The age groups of respondents

Data Analysis and Major Findings

Figure 4.4

107

The total years of work experiences of respondents

into the category ranging from 10 to 19 years. Although 22 (16.7 per cent) of the respondents reported that, they had between 20 and 29 years experience, only seven people (5.3 per cent) reported that their work experience amounted to 30−39 years. The remainder (n = 2, 1.5 per cent), possessed 40 or more years of work experience. Therefore, in short, the ﬁndings reveal that the majority of the respondents (n = 63) had a total work experience of between 10 and 19 years and minority of them (n = 2) had a total work experiences of 40 years or more. The correlation between work experiences and the other managerial characteristics will be discussed later. Table 4.2 shows the cross tabulation between the age of the respondents and their total years of work experience. Gender Regarding gender, the majority of the respondents (n = 122, 92.4 per cent) were male and only 7.6 per cent of the respondents (n = 10) were female. This result conﬁrms that, most of the top management and especially the executive positions in the electric and electronic industry were occupied by men rather than women. Perhaps this result is related to the nature of the industry. Education Another interesting characteristic of the CEOs is their education. Education may be considered as indicative of one’s knowledge and skill base. As noted by Hitt and Tyler (1991) the executive who has one type of formal education can be expected to have developed different problem-solving skills and mental models with which to formulate strategy than an executive with a different type of formal education. In this regard the researchers decided to measure the CEOs’ educational level in conjunction

108

Strategy Formulation in Entrepreneurial Firms

with their educational background. The educational level of the respondents was divided into four categories including: up to A level, undergraduate, master degree, and PhD or equivalent (see Figure 4.5). Nearly half of the respondents (n = 67, 50.8 per cent) reported that, they had a ﬁrst degree in areas such as engineering, management and sciences. Thirty (22.7 per cent) of the respondents reported their Table 4.2

The cross tabulation of age and work experiences of respondents

Age of respondents

Work experiences of respondents

Count Expected Count % of Total 40–49 Count Expected Count % of Total 50–59 or more Count Expected Count % of Total Total Count Expected Count % of Total 30 or below 39

Figure 4.5

9 or less

10–19

20–29

30–39

36 10.8 27.69 0 16.61 0 0 8.58 0 36 36 27.69

3 18.9 2.3 60 29.07 46.15 0 15.02 0 63 63 48.46

0 6.6 0 0 10.15 0 22 5.24 16.92 22 22 16.92

0 2.1 0 0 3.23 0 7 1.66 5.38 7 7 5.38

Educational level of respondents

40 or more 0 0.6 0 0 0.92 0 2 0.47 1.53 2 2 1.53

Total

39 39 30 60 60 46.15 31 31 23.84 130 130 100

Data Analysis and Major Findings

109

education was up to A level, whilst 26.5 per cent (n = 35) of the respondents reported that they possessed a postgraduate degree. The post graduate category includes Master degree (n = 28, 21.2 per cent), and PhD or equivalent (n = 7, 5.3 per cent). In order to ﬁnd out about the educational background of the CEOs, they were also asked to indicate their area of study and the ﬁeld in which they had graduated. The responses received were categorized into ﬁve groups. The ﬁrst group, ‘engineering’ included mainly electronic engineering and the other engineering ﬁelds of study. The second group, ‘management and business studies’ included different areas such as, business administration, marketing, management, ﬁnance and accounting, human resource management, and public administration. The third group, ‘science’ included the respondents who graduated in a variety of pure and applied science courses such as mathematics, physics and computer sciences. The fourth group, ‘technology’ included information technology, industrial technology, industrial management, and technology development. Finally the last group, ‘general’ accommodates the respondents who did not seem to have had any formal degree from a further or higher education institute. The respondents, who had general qualiﬁcations such as diplomas, are included in this category. From amongst these groups, the engineering group had the most frequency (n = 45, 34 per cent). In contrast, the technology group had the minimum frequency of respondents (n = 10, 7.6 per cent). One of the considerable ﬁndings of this research is that, about 21.2 per cent (28) of the respondents had not had any higher education. It has also been found that 34 of the CEOs for the response rate of 25.8 per cent reported that they had a degree in management and business studies. Figure 4.6 provides a summary of the respondents’ educational background.

Figure 4.6

Respondents’ educational background

Strategy Formulation in Entrepreneurial Firms

110

Management Training Regardless of the respondents’ differing educational levels or background, the CEOs were asked to indicate whether or not they have had any management training. In this regard, 89 per cent of the respondents reported that, they have attended some form of management training programme, while only 11 per cent of the respondents reported that, they have not attended any management training programmes at all (see Figure 4.6). The management training programs reported here are different from those of the formal degrees offered in management. However, by checking the details of the responses provided, it was realized that, all the CEOs with a formal degree in management, answered yes to this question. Strategic Planning Activities In the ﬁrst section of the business planning audit the respondents’ perceptions of strategic planning in the studied ﬁrms were examined. Developing business plans, the ﬁrms’ objectives, mission statement, the degree of formality of the strategic planning, and planning typology are some of the main issues which have been investigated and reported in this section. The Degree of Formality Involved in Business Planning One of the main issues in small and medium-sized enterprises is the degree of formality involved in the planning activities. In this study, 83 per cent of the business owners and operators surveyed indicated that they employed business planning techniques (see Figure 4.7).

Figure 4.7

Employing business plan in the studied ﬁrms

Data Analysis and Major Findings

111

They stated that they are implementing a business plan outlining all strategic, operation and ﬁnancial plans of their companies. Consequently, the majority of the respondents indicated that they also have many of the components of a business plan, such as a corporate mission statement, marketing, ﬁnancial and operational plans. The respondents believed that formal business planning is necessary for the success of the small business. In contrast, only 17 per cent of the respondents indicated that they do not employ either formal or informal business plans. Regarding the review of the business plan in the studied ﬁrms, 72 per cent of the respondents noted that the senior management of their companies meet at least monthly to deal with the issue of business planning. Who are involved in Business Planning? The majority of business owner managers were responsible for business planning in the studied ﬁrms. Whilst 76 per cent of respondents reported that senior managers were primarily responsible for the task of business planning in their companies, 14 per cent stated that middle managers have the responsibility of developing business plans in the studied ﬁrms. Another 6 per cent of the respondents indicated that internal strategic planning groups and committees were primarily responsible for business planning and 2 per cent indicated external professionals, such as consultants or colleagues not employed by their company, as being primarily responsible for business planning. The remaining 2 per cent stated that a combination of individuals, both internal and external to the company, oversee the business planning process for their companies. The Degree of Involvement of the Studied Firms in Planning Activities Respondents were asked to indicate whether or not their companies were employing speciﬁc indicators and elements of the formal business planning and also to indicate the extent to which their ﬁrms place emphasis on the speciﬁc indicators in developing their strategic plans. These indicators include mission statement, trend analysis, competitor analysis, long term plans, annual goals, short term plans, and ongoing evaluation. Figure 4.8 illustrates the categories of the studied ﬁrms in terms of their involvement in planning activities. No planning Varying degrees of strategic planning were observed among the sample. If a company did not engage in any of the strategic planning indicators, that company was categorized as a non-planner. Only 17 per cent of the respondents indicated that they employ none of the seven business planning techniques. In these ﬁrms, no planning activities were reported. Accordingly, no mission and objectives either short term or long term have been developed. Informal ﬁnancial planning if a company employed up to two of the techniques, such as short-term objectives, then it was categorized as being an informal ﬁnancial planner. Data analysis shows that 21 per cent of the studied ﬁrms employed ﬁnancial planning. In this group, respondents rated formal ﬁnancial planning as being an essential activity. CEOs stress the importance of tight ﬁnancial controls and performance. It has also been found that, the ﬁrms develop short-term (up to one

112

Figure 4.8

Strategy Formulation in Entrepreneurial Firms

Classiﬁcation of the studied ﬁrms in terms of their involvement in planning activities

year) to medium-term (up to two years) ﬁnancial objectives. The ﬁrms in this group were not engaged in strategic planning at all. Formal ﬁnancial and informal strategic planning if a company incorporated three or four of the mentioned techniques, then the company was categorized as being a formal ﬁnancial and informal strategic planner. It has been found that 38 per cent of the studied ﬁrms were involved in formal ﬁnancial and informal strategic planning. Respondents in this group, believed in the importance of informal strategic planning. While ﬁnancial planning and performance were tightly controlled and monitored. The ﬁrms that have had a mission statement and long-term ﬁnancial objectives speciﬁed a two to ﬁve years planning horizon. In this group of the studied ﬁrms, mission statement, objectives and business strategies are not formalized in a business plan. However, their business plan has been clearly communicated and known throughout the ﬁrm. Formal strategic planning Finally, if a company has been engaged in ﬁve or more of the seven strategic planning indicators, then that company was categorized as being a formal strategic planner. Data analysis shows that 32 per cent of the studied ﬁrms reported practicing ﬁve or more of the business planning techniques, therefore, these ﬁrms were categorized as being formal strategic planners. In this group management stressed the importance of a formal and explicit process of

Data Analysis and Major Findings

113

strategy formulation, written mission statement and stating long term objectives over a two to ﬁve years planning horizon. Formal and written strategic plans were produced and reviewed on a six monthly or annual basis. In these ﬁrms, the formal strategic business plans are developed reﬂecting management perception and belief that signiﬁcant beneﬁt will arise for the company. Developing Objectives and Mission Statement in the Studied SMEs The respondents were asked to indicate whether or not in their ﬁrm they have either stated business objectives or a mission statement. If so, what are those objectives? The results showed that, the majority of the ﬁrms (n = 104, 78 per cent) have a formal mission statement, while only (n = 25) 19 per cent of the respondents reported that, they do not have a formal mission statement. Two per cent of the respondents (n = 3) did not answer the question at all (see Figure 4.9). The ﬁndings of this research supports the results of the previous studies. For instance, in David’s (1989) survey of the Business Week 1000, only 41 per cent of the ﬁrms indicated that, they had mission statements. Purposes of Mission Statement In order to explore why SMEs have a mission statement, it would be useful to compare the result of this study with the result of a similar study in large ﬁrms. Baetz and Bart’s (1996) work on developing mission statement in 135 large Canadian organizations showed that, mission statements have been used by 86 per cent of the

Figure 4.9

Mission statements in SMEs

114

Strategy Formulation in Entrepreneurial Firms

ﬁrms. They reported that, the main reasons for having a mission statement in large ﬁrms were: 1. to guide the strategic planning system; 2. to deﬁne the organization’s scope of business operations/activities; 3. to provide a common purpose/direction transcending individual and department needs; 4. to promote a sense of shared expectations among all levels of employees, thereby building a strong corporate culture (i.e. shared value); and ﬁnally, 5. to guide leadership style” Baetz and Bart (1996, 528). In the present study the respondents were speciﬁcally asked to indicate the purpose of developing a mission statement within their ﬁrms. In this regard, the data analysis shows that, the mission statements were being used for different reasons. The purposes of having a mission statement based on the respondent’s stated priority are as follow: • • • •

developing and planning business strategies increasing proﬁt and growth rate customer satisfaction and promoting a sense of shared expectations among entrepreneur and all employees.

The list of the purposes for having mission statements according to the respondents own priority shows that, the ﬁrms choose to have a mission statement in order to develop and plan their business strategies (ﬁrst priority), to increase proﬁt and growth (second priority); to increase the customers satisfaction (third priority), and to promote a sense of shared expectations among entrepreneur and all the employees (fourth priority). These results echo the results of O’Gorman and Doran’s (1999) work on mission statements in small and medium sized businesses. In the present research, it has been found that, in small businesses as well as large ﬁrms, a formal mission statement is an important tool for strategic planning. In SMEs the mission statement is more related to strategy formulation rather than implementation of business strategies. Also, SMEs use mission statement for increasing their proﬁt and growth within the industry. Increasing customer satisfaction is another reason for developing mission statement in SMEs. While based on the results of Baetz and Bart (1996) study, in large ﬁrms, the second priority for having a mission statement is to deﬁne the organization’s scope of business operations/activities. Finally, promoting shared thinking and expectation amongst owner managers/entrepreneurs and employees is another reason for having a mission statement in SMEs. Signiﬁcance of Internal and External Factors As it has been discussed in Chapter 2, senior managers’ perception of the importance of their ﬁrms’ strengths and weaknesses as well as opportunities and threats could impact on the developing business strategy. This research has attempted to explore

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115

the perceptions of the SMEs managers’ perception of the above four factors. The respondents were asked to indicate the signiﬁcance of each of the ﬁrm’s internal strengths, internal weaknesses, and external opportunities and threats in developing business strategies. According to the data analysis, the respondents believed that external opportunities (Mean = 4.32, Std = 1.73) are signiﬁcant factors in developing business strategies. In contrast, the respondents considered the external threats (Mean = 1.98, Std = 1.32) as being less of a signiﬁcant factor in developing business strategies. Regarding the internal factors, the respondents gave the priority to the internal strengths ((Mean = 4.18, Std = 0.95), rather than internal weaknesses (Mean = 3.72, Std = 1.14) in developing business strategies. Generally speaking, it could be said that, in the studies of SMEs the strategists give the priority to the external opportunities and internal strengths when developing business strategies. The details of these ﬁndings will be discussed in the next chapter. Environmental Analysis in Small and Medium-sized Enterprises Importance of the External Environmental Factors As discussed in Chapters 2 and 3, in strategy research the external and task environment have been considered as key factors in developing business strategies. In order to investigate the importance of external factors in formulating business strategies in SMEs, in this research, the respondents were asked to indicate to what extent internal and external environment factors affect their ﬁrm’s strategy. A ﬁvescale Likert scale was applied for these questions in this section. As for the reliability of the data, by calculating alpha (α) coefﬁcient, it was found that there was internal consistency between the responses provided in each group (see Table 4.3). Table 4.3

Importance of environmental factors in the ﬁrm’s decision-making process

Environmental factors Technological changes Competitors Economic Trends Social and cultural trends Political & legal developments

Alpha* α 0.83 0.79 0.68 0.76 0.62

Percentage

Mean

34% 23% 20% 12% 11%

3.84 3.76 3.55 3.01 2.82

Std. Deviation 1.03 1.07 1.12 1.15 1.15

*Internal consistency within each group

Regarding the external factors, the importance of economical trends, socio-cultural trends, competitors, technology and political factors in strategic management have also been investigated. As illustrated in Table 4.4 regarding the effect of technological changes (Mean = 3.84, Std. D = 1.03) on the ﬁrm’s strategy, only one of the respondents (n = 1, 0.76 per cent) rated the effect as poor. While, many of

116

Table 4.4

Poor Below average Average Above average Outstanding Total

Strategy Formulation in Entrepreneurial Firms

Importance of environmental factors in strategic management Technological Competitors Economical Social & Changes Trends Cultural Trends N=1 N=6 N=7 N=12 (.76%) (4.58%) (5.34%) (9.16%) N=16 N=7 N=17 N=34 (12.21%) (5.34%) (12.98%) (25.95%) N=27 N=36 N=31 N=41 (20.61%) (27.48%) (23.66%) (31.30%) N=46 N=45 N=49 N=29 (35.11%) (34.35%) (37.40%) (22.14%) N=41 N=37 N=27 N=15 (31.30%) (28.24%) (20.61%) (11.45%) N=131 N=131 N=131 N=131 (100.00%) (100.00%) (100.00%) (100.00%)

Political Factors N=16 (12.21%) N=40 (30.53%) N=37 (28.24%) N=27 (20.61%) N=11 (8.40%) N=131 (100.00%)

the respondents (n = 41, 31.30 per cent) rated the effect of technological change on developing ﬁrm’s strategy as outstanding. 35.1 % of the respondents also rated the importance of the technological changes above average. Generally speaking, technological changes have been considered as the strongest factor which inﬂuences the formulation of business strategies in the studied ﬁrms. In contrast, political factors have been considered as the weakest factor in inﬂuencing the formulation of the business strategies in the studied ﬁrms. The respondents rated the importance of the political and legal developments factors (Mean = 2.82, Std. D = 1.15) as poor and below the average (n = 56, 42.47 per cent). While 11 of the respondents rated technological changes as outstanding, in comparison, the importance of competitors (Mean = 3.76, Std. = 1.07) has been rated as being in second priority After the technological factors (poor and below average 9.92 per cent, average 27.48 per cent, above average and outstanding 62.59 per cent). The importance of economical trends (Mean = 3.55, Std. = 1.12) has been rated as third priority (poor and below average 18.32 per cent, average 23.66 per cent, above average and outstanding 58.01 per cent). It is interesting to note that, the respondents rated the importance of social and cultural factors as the fourth level of priority (Mean = 3.01, Std. = 1.15) (see Figure 4.10). The Five Competition Forces of Strategy Apart from assessing the general environmental factors on the process of strategy formulation in the studied companies, the effects of the factors within the industry have also been investigated. To do this, Porter’s ﬁve-force model (Porter, 1980) has been applied.

Data Analysis and Major Findings

117

Figure 4.10 Importance of environmental factors in strategic management

The results of the analysis show that, ﬁve external forces including the bargaining power of customers (Mean = 3.71, Std. = 0.88), bargaining power of suppliers (Mean = 3.09, Std. = 0.91), rivalry among existing ﬁrms (Mean = 3.73, Std. = 0.99), threat of new entrants (Mean = 3.12, Std. = 0.95) and ﬁnally, threat of substitute products (Mean = 3.32, Std. = 1.12) tend to inﬂuence the strategy formulation in the electrical and electronic industry. Accordingly, the respondents were asked to rank the above factors based on their perceived importance on the ﬁrm’s strategy formulation process. It has been found that the bargaining power of customers (62.8 per cent) seemed to be regarded as the most important factor. Rivalry amongst existing ﬁrms (62.1 per cent) followed closely as the second most important factor and the threat of substitute new products (40.7 per cent) formed the third priority. In contrast, the threat of new entrants (28.1 per cent) and the bargaining power of suppliers (25 per cent) did not seem to inﬂuence strongly the formulation of strategy in the targeted ﬁrms. Industry Strength Factors In this research the factors relating to industry strengths have been studied using seven indicators including potential growth, market share, ﬁnancial stability, resource usage, productivity, capacity usage, ﬂexibility and ﬁnally adaptability. These indicators were measured using ordinal scale from not important to essential. As it has been illustrated in Table 4.5, ﬁnancial stability (Mean = 4.356, Std. = 0.782)

Strategy Formulation in Entrepreneurial Firms

118

Table 4.5

Descriptive statistics of industry strengths factors Number

Mean Std. Deviation

Variance

Skewness

Financial stability & industry strength

132

4.356

0.782

0.612

-1.304

Adaptability & industry strength

128

4.218

0.85

0.723

-0.827

Flexibility & industry strength

128

3.96

0.873

0.762

-0.789

Product quality & industry strength

128

3.89

1.117

1.247

-0.779

Resource utilization & industry strength

128

3.843

0.917

0.841

-0.491

Growth potential & industry strength

130

3.776

1.005

1.011

-0.651

129

3.565

1.029

1.06

-0.528

Market share & industry strength

is perceived as the most important factor in determining industry strengths in the studied ﬁrms. In contrast, market share (Mean = 3.565, Std. = 1.029) was reported as the weakest factor in determining industry strengths. It seems that, the turbulent environment of the industry and the changing expectations of the customers in the electronic industry, pushes the ﬁrms to be more adaptable and ﬂexible in developing business strategies. The importance of each factor in determining industry strengths were measured using the Likert scale. Regarding the ﬁnancial stability of the ﬁrms, 106 respondents (87.9 per cent) believed that, ﬁnancial indicators are very important and essential in determining industry strength. In contrast, only a few of respondents (n = 3, 2.3 per cent) considered ﬁnancial indicators as not important or of limited importance in determining industry strengths. The respondents considered the adaptability (n = 103, 78 per cent for very important and essential) and ﬂexibility (n = 87, 65.9 per cent very important and essential) of the ﬁrm’s strategies with customers’ expectations as a factor determining the industry’s strengths but in second priority. The ﬂexibility of the ﬁrm in terms of coping with unexpected changes in the marketplace, managerial style, and technology usage have been considered as an essential factor in the ﬁrm performance. Respondents prioritized the other factors in determining industry strengths including: quality of products and services (n = 81, 61 per cent very important and essential) as third priority, resources usage like HR and ﬁnancial resources (n = 79, 59 per cent very important and essential) as fourth priority, growth potential (n = 75, 56 per cent very important and essential) as ﬁfth priority, and market share (n = 71, 53 per cent very important and essential) as the sixth priority.

Data Analysis and Major Findings

119

Environmental Analysis and Firm Size In the second part of the questionnaire the aim was to examine the respondents’ perception of environmental scanning as the ﬁrst step towards formulating a strategic management process in SMEs. The respondents were asked to indicate whether or not they were engaged in formal or informal environmental scanning in their organizations. Whilst the majority of the respondents (n = 125, 94 per cent) indicated that, they were generally involved in environmental scanning for the purpose of formulating their ﬁrm’s business strategies, only 118 ﬁrms (89 per cent) claimed to use formal environmental analysis. Accordingly, the respondents were asked to rate the importance of formal or informal environmental scanning within their organizations. The responses were varied in terms of the size of organizations. Table 4.6 shows the variation in the managerial perception of the CEOs of the importance of environmental analysis within the studied ﬁrms. Some 3 per cent of the ﬁrms considered environmental analysis as not an important factor in the ﬁrm’s strategy formulation. In contrast, some 51 per cent of the respondents described the environmental analysis as a very important and essential factor in their ﬁrms’ strategic management process. The ﬁndings seem to indicate that the perception concerning the importance of environmental analysis seems to increase, as ﬁrms get bigger. Almost all managers in medium sized enterprises (n = 40 out of 59) felt that, environmental analysis is important and therefore it forms an essential factor in developing their business strategy. In contrast, only one micro-enterprise CEO (n = 1 out 8) rated environmental analysis as a very important factor. Simultaneously, a slightly lower proportion of the smaller enterprises than the medium sized ones (n = 26 out of 68) felt that environmental analysis must be considered as a very important factor in developing business strategies.

Table 4.6

Environmental analysis by ﬁrm size Size of organization by number of employees

Extent of importance of environmental analysis

Micro enterprises

Small enterprises

Medium enterprises

Total

Not important

3 (2.27%)

1 (0.70%)

0 (0.00%)

2.97%

Limited important

2 (1.53%)

16 (12.12%)

0 (0.00%)

13.65%

Important

2 (1.53%)

38 (28.78%)

3 (2.27%)

32.58%

Very Important

1 (0.70%)

21 (16.11%)

12 (9.09%)

25.81%

Essential

0 (0.00%)

5 (3.78%)

28 (21.21%)

24.99%

8

81

43

132 (100%)

Total

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Strategy Formulation in Entrepreneurial Firms

Strategy Implementation in SMEs Effective strategy implementation is an important part of the strategic management process in the organization. According to the researches in the ﬁeld of strategic management there are some elements which help strategists to implement the business strategies successfully. In this research an attempt has been made to identify these elements in small and medium-sized enterprises and explore the senior managers perception of their importance in SMEs. Some of these elements included organizational structure, human resources, quality of leadership, costing programmes and ﬂexibility of business plans. Table 4.7 illustrates the descriptive statistics of the strategy implementation variables. In this section the respondents’ perception of the importance of these elements have been explored. Table 4.7

Descriptive statistics of the strategy implementation variables

Variables Organizational structure Organizational employees Costing programs Standard operating procedures Flexible and adaptable business plans Quality of leadership Lower managers involvement in implementation of strategy

N

Mean

Std. Deviation

130 130 128 129 130 131 131

3.90 3.58 3.91 3.70 3.95 4.14 3.56

1.041 1.263 .959 1.020 1.081 1.135 1.272

Organizational Structure The respondents were asked to indicate the extent of the importance of organizational structure for the implementation of strategy. The data analysis shows that the majority of respondents (Mean = 3.90, Std = 1.04) believed that the business strategy should be associated with the type of organizational structure. Employing one-sample T test (t(129) = 42.370, P < 0.01) it has been found that SMEs managers perceive organizational structure to be a signiﬁcant factor in developing the business strategies (see Table 4.8). In other words, the respondents believed that if the ﬁrm’s structure and strategy are not matched, in practice such a strategy could not be implemented effectively. Employees Human resource is an important variable in strategy implementation. No strategic plan will be implemented without highly skilled and motivated employees. The

Data Analysis and Major Findings

Table 4.8

121

One-sample test on strategy implementation variables

organisational structure

42.730

129

Sig. .000

Mean 3.90

organisational employees

32.294

129

.000

3.58

costing programs

46.069

127

.000

3.91

standard operating procedures

41.168

128

.000

3.70

flexible and adaptable business plan41.638

129

.000

3.95

quality of leadership

41.715

130

.000

4.14

lower managers involvement in strategy implementation

32.088

130

.000

3.56

respondents believed (Mean = 3.58, Std = 1.263) that the ﬁrm’s employees are signiﬁcantly important in implementing business strategies. Data analysis (t (129) = 32.294, P < 0.01) shows that in small and medium enterprises, employees are considered to be the main factor in implementing strategy effectively. The respondents put more emphasis on trained and skilled human resources for strategy implementation. Accordingly, it was observed that the ﬁrms, especially within the high tech industry, invest in people. The details of the human resources and their importance in strategy implementation will be discussed in the next chapter. In summary, recently human resources has been considered as a strategic asset in organizations. Costing Programmes and Standard Operating Procedures In order to implement the strategy, it should be deﬁned in the format of the programmes. Accordingly, each programme should contain the standard operating procedures. It is clear that the ﬁnancing and budgeting of programmes can put them into action. In this regard, the respondents in the studied ﬁrms perceived costing programmes as an important factor in implementing business strategies. They strongly believed (Mean = 3.91, Std = 0.959) that without costing no strategic plan will be implemented. Accordingly, they believed (Mean = 3.70, Std = 1.020) that the ﬁrm should develop standard operating procedures to implement their programmes and strategy. Flexibility of Business Plans The respondents were asked to indicate whether they agree or disagree with the association between the ﬂexibility and adaptability of business plans and their implementation in action. In general the respondents believed (Mean = 3.95, Std = 1.081) that successful business plans are ﬂexible and adaptable to the organizational culture and unpredictable circumstances. They emphasized that rigid business plans

122

Strategy Formulation in Entrepreneurial Firms

cannot cope with the turbulent environment and consequently would be difﬁcult to implement effectively. Quality of Leadership Finally, the quality of leadership and type of management has been considered as another variable in implementing strategy successfully. The respondents were asked to indicate the importance of the quality of leadership in implementing strategy. Data analysis shows that the SMEs managers believed that (Mean = 4.14, Std = 1.135) the quality of leadership and management style signiﬁcantly (t (130) = 41.715, P < 0.01) inﬂuence the implementation of the business strategies in small and medium-sized enterprises. Strategic Management and Organizational Factors The respondents were asked to show whether or not a systematic approach to strategic management has been established within their ﬁrms. The data analysis shows that the majority (n = 96, 74 per cent) of the SMEs’ managers believed that a systematic approach to strategic management had been established within their ﬁrms. In the next section the respondents were asked to rate the impact of establishing a systematic approach to strategic management on these organizational factors. Generally speaking, it has been found that establishing a systematic approach to strategic management positively impacts on the organizational factors (see Table 4.9). The details of the data analysis are as follows.

Table 4.9

Impact of strategic management approach on organizational factors*

Variable

d.f

t-statistics

P-value

Adapting with environmental changes Operational decision making Developing business plans Implementing business plans Quality of product or services Solving organizational problems Employees satisfaction Changing organizational culture Reducing organizational conﬂict Firm’s proﬁtability Achieving organizational objectives Organizational effectiveness

130 128 128 124 131 129 129 126 128 130 128 128

36.659 34.903 39.782 40.943 18.695 19.860 39.590 18.804 21.138 39.661 39.774 38.873

P<0.01 P<0.05 P<0.01 P<0.01 P<0.05 P<0.01 P<0.05 P<0.01 P<0.05 P<0.01 P<0.01 P<0.01

* : Mean Importance Rating 3 : Mean Importance Rating < 3

Data Analysis and Major Findings

123

Adaptability to Environmental Changes The respondents were asked to rate how important establishing a systematic approach to strategic management, within the studied ﬁrms, was to their ability to adapt to environmental changes. The result of T test (t(130) = 36.659, P < 0.01) shows that there was a signiﬁcant association between establishing a systematic approach to strategic management and the ﬁrm’s adaptability to the environmental changes. The ﬁrms, which employed strategic management tools, were more adaptable to environmental changes such as changes in the technological domain. Developing and Implementing Business Plans The respondents believed that establishing a strategic management approach helps senior managers to develop an effective business plan. It has also been found that in order to implement a business plan successfully there is a need to establish a strategic management approach. In this research, the ﬁndings of the data analysis illustrates the signiﬁcant impact of establishing a strategic management approach on developing (t (128) = 39.782, P < 0.01), and implementing business plans (t (124) = 40.943, P < 0.01) in the studied ﬁrms. Operational Decision-Making The respondents were asked to indicate whether or not employing strategic management tools impacts on the operational decision-making process. Using T test, the result of data analysis reveals that, establishing a strategic management approach, signiﬁcantly (t(128) = 34.903P < 0.05) impacts on the operational decision making in the studied ﬁrms. This ﬁnding will be discussed in the next chapter. Employees’ Satisfaction and Organizational Culture Based on the ﬁndings from the data analysis, it became apparent that the respondents believe that, a strategic management approach signiﬁcantly impacts on employees’ satisfaction (t(129) = 39.590, P < 0.05), and the changing organizational culture (t(126) = 18.804, P < 0.01). In other words, the employees satisfaction in the ﬁrms which have employed strategic management tools seems to be higher than the ﬁrms which have not employed such decision making tools. Probably, involving the employees in the process of decision making as an example of a strategic management technique will increase their participation in implementing the plans and consequently leads to their organizational satisfaction. Organizational Conﬂict and Problem Solving The result of data analysis shows a signiﬁcant association between establishing a strategic management approach within the studied ﬁrms and solving organizational problems. For instance, the respondents believed that, using a strategic management process in SMEs signiﬁcantly helps in solving organizational problems (t(129)

124

Strategy Formulation in Entrepreneurial Firms

= 19.860, P < 0.01), and reducing organizational conﬂict (t(128) = 21.138, P < 0.05). Overall Firm’s Objectives and Performance Initially an attempt has been made to answer the question whether or not establishing a systematic approach to strategy impacts on the overall ﬁrm performance. Accordingly, by using the two-sample T test it was discovered that, the respondents believed employing strategic management procedures in the studied ﬁrms signiﬁcantly impacts on the quality of product or services (t(131) = 18.69, P < 0.05), achieving organizational objectives (t(128) = 39.774, P < 0.01), ﬁrm proﬁtability (t(130) = 39.661, P < 0.01), and overall organizational effectiveness (t(128) = 38.873, P < 0.01). The measurement of the ﬁrm performance will be explained in the next section and the details of the strategy and ﬁrm performance will also be discussed in the next chapter. Firm Performance Measurement Performance measures are a common control mechanism. They communicate desired outcomes or behaviour to employees and are used to evaluate the degree of success in achieving goals. It is generally believed that the best performance measures are those linked to a ﬁrm’s strategy (Kaplan and Norton, 1992; Nanni, Dixon and Vollmann, 1992; Langﬁeld-Smith, 1997). In order to measure the organizational performance at corporate level, a methodology has been developed by Quezada et al. (1999). This methodology, which is based on the Buzzell and Gale (1987) work, considers the internal and external analysis as well as monitoring the process of the results of the strategy as being supported by the use of performance indicators. The questions that usually arise when attempting to deﬁne the indicators to be used is, ‘do the factors have an impact on producing a sustainable proﬁt and how can they be quantiﬁed?’ An important investigation to answer these questions was carried out in a programme called Proﬁt Impact of Market Strategies (PIMS). This methodology considers the 30 most important factors found by PIMS study, although a reduced number of them is selected to be used in each company according to its particular characteristics. They are calculated for the past three years for two reasons: (a) to analyse their trend and (b) PIMS speciﬁes that three years is the minimum number to obtain valid conclusions. A partial list of them is: • • • • • • •

Net sales. Sales index: net sales in relation to a reference value of 100. Capital intensity: investment divided by added value. (Added value = net sales − cost of purchases) Productivity: added value per employee. Relative market share: market participation in relation to three main competitors. Market growth.

Data Analysis and Major Findings

• • •

125

Frequency of innovation: sales of products with less than three years in the market. Vertical integration: added value divided by sales. Direction of the change of the previous indicators

These performance indicators are calculated at a company level – to obtain an overall picture of the situation of the company – and at an SBU level in order to obtain an evaluation of the present situation of each SBU as well as its perspectives. As it can be seen, the indicators are easily obtained from the Balance Sheet and the Income Statement. A simple questionnaire is used to obtain those data not contained in the ﬁnancial statements. It should be noted that the methodology looks at what the customer wants in order to formulate a strategy that is consistent with the scale of values of the owner. The performance indicators have the objective of evaluating whether the strategy is making the company achieve the goal deﬁned. In addition to the above-discussed methodology, some other methodologies were employed to measure the ﬁrm performance in SMEs. For instance Stewart (2002) in his recent study has deﬁned the small business success by the extent to which the ﬁrm exhibits a number of indicators of business growth and success. A total of ﬁve indicators were incorporated to measure small business success: 1) increasing staff, 2) expanding clientele, 3) international growth, 4) establishing new sites and, 5) acquiring businesses. All of the small business success indicators were weighted equally. As noted earlier, this study relies on perceptual measures of the ﬁrm’s performance. It has beneﬁted from the former methodologies for measuring the ﬁrm performance in small and medium-sized enterprises. In order to measure the ﬁrm’s performance respondents were asked to indicate using a ﬁve-point scale, ranging from 1 = very unimportant to 5 = very important, the degree of importance they attached to each of ﬁnancial and non-ﬁnancial performance indicators. The employed performance indicators were as follows: • • • • • • • •

Net sales. Proﬁtability Market growth. Increasing product quality Productivity Innovation and IT Increasing number of employees Entering to international markets

This method has been widely used in previous studies (Beal, 2000). The respondents were further asked to indicate the extent of their satisfaction with their ﬁrm’s performance along each of the performance indicators. In order to analyse the data and determine the speciﬁcation of the ﬁrms in terms of their performance, the ﬁrms that responded to the survey were ranked into three categories based on their performance namely, high, moderate, and low performance. This method has already been used largely in similar studies (for example, O’Gorman and Doran, 1999; Chan and Foster, 2001). Of 132 ﬁrms involved in the survey, 52 (39 per cent) were ranked

126

Strategy Formulation in Entrepreneurial Firms

in the top performing quartile (high performance), 41 (31 per cent) in moderate and 39 (30 per cent) were ranked in the lowest performing quartile (low performance). In some cases the ﬁrms with moderate performance were excluded and consequently compared with the percentage of the high-performer and low-performer ﬁrms in terms of the research questions. Summary and Conclusion In this chapter the data collected through postal questionnaire was analysed. Descriptive statistical techniques such as mean, standard deviation, and statistical graphs such as bar chart, pie chart were employed to get a clear picture of the data. Using statistical tests for normality, the collected data were categorized into two groups consisting of the data which was distributed normally and the data which did not distribute normally. Accordingly, based on the distribution of the data and the level of the measurement of the data, statistical techniques for data analysis and testing the hypotheses namely parametric and non-parametric methods were selected. References Baetz, M.C. and Bart, C.K. (1996), ‘Developing Mission Statements which Work’, Long Range Planning, 29(4), 526−533. Beal, R.M. (2000), ‘Competing Effectively: Environmental Scanning, Competitive Strategy, and Organisational Performance in Small Manufacturing Firms’, Journal of Small Business Management, 38(1), 27−47. Berry, M. (1998), ‘Strategic Planning in Small High Tech Companies’, Long Range Planning, 31(3), 455−466. Buzzell, R.D. and Gale, B.T. (1987), The P.I.M.S. Principles: Linking Strategy to Performance, (The First Press, New York). Chan, S.Y. and Foster, J.M. (2001), ‘Strategy Formulation in Small Business: the Hong Kong Experiences’, International Small Business Journal, April/June. Cooper, R.G. (1973), ‘Technical Entrepreneurship: what do we Know?’ R&D Management, 3(2), 59–64. David, F. (1989), ‘How Companies Deﬁne their Mission’, Long Range Planning, 22(2), 90−97. Hitt, M.A. and Tyler, B.B. (1991), ‘Strategic Decision Models: Integrating Different Perspectives’, Strategic Management Journal, 12, 327−351. Kakabadse, A. (1999), ‘Younger Does Not Mean Better’, The British Journal of Administrative Management, Orpington, January/February, 9−11. Kaplan, R.S. and Norton, D.P. (1992), ‘The Balanced Scorecard: Measures that Drive Performance’, Harvard Business Review (January/February), 71−79. Langﬁeld-Smith, K. (1997), ‘Management Control Systems and Strategy: A Critical Review’, Accounting, Organizations and Society, 22(2), 207−252. Nanni, A.J., Jr, Dixon, J.R. and Vollmann, T.E. (1992), ‘Integrated Performance Measurement: Management Accounting to Support the New Manufacturing Realities’, Journal of Management Accounting Research, 4(Fall), 1−19.

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O’Gorman, C. and Doran, R. (1999), ‘Mission Statements in Small and Medium Sized Businesses’, Journal of Small Business Management, 37(4), 59−66. Porter, M. (1980), Competitive Strategy (New York: Free Press). Quezada, L.E., Córdova, F.M., Widmer, S. and O’Brien, C. (1999), ‘A Methodology for Formulating a Business Strategy in Manufacturing Firms’, International Journal of Production Economics, 60−61(20), 87−94. Stewart, K.S. (2002), ‘Formal Business Planning and Small Business Success: A Survey of Small Businesses with an International Focus’, Journal of American Academy of Business, 2(1), 42−46.

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Chapter 5

Strategic Entrepreneurship Introduction Strategic management has its roots in the efforts of early policy scholars to develop a means of cross-disciplinary integration for the purposes of increased efﬁciency (Teece, 1992; Hitt et al., 2002). But today, speed and action are the core elements of the rapidly changing environment. The past decade of organizational research has moved from an investigation of the organization as a static entity to an investigation of organizations as dynamic entities, much of it focused on strategy, and its formulation and implementation (Wortman, 1994; Chan and Foster, 2001). Strategic management has shifted much of its interest from static industry models and efﬁcient markets to more dynamic models of change and ﬂexibility (Hoskisson, 2000; Hitt et al., 2002; Johnson, Scholes and Whittington, 2005). With increasing interest in speed and action, the new economy is an entrepreneurial economy. Therefore, all organizations, regardless of their size and age, must be entrepreneurial to effectively compete and survive. This chapter considers strategy development issues addressing the role of entrepreneurs as the ultimate decision maker in entrepreneurial ﬁrms. Considering the objectives of the study, this chapter provides the discussion of the ﬁndings of the research, related to the main propositions, in two separate but interlinked sections. In the ﬁrst section the ﬁndings of the research on CEOs’ perception of the importance of strategic management processes within the studied ﬁrms will be discussed. This section explores and examines the association between the establishment of a strategic management approach and selected organizational factors. The second section of the chapter explores the role of senior managers in strategic management within the entrepreneurial ﬁrms studied. In this section the relationships between managerial characteristics and strategy formulation and implementation within the studied ﬁrms will be discussed. Finally, the chapter ends with analysis of resource capabilities and innovation in entrepreneurial ﬁrms. Entrepreneur as Strategist It has been discussed (Burns, 2007) that ‘entrepreneurs use innovation to exploit or create change and opportunity for the purpose of making proﬁt. They do this by shifting economic resources from an area of lower productivity into an area of higher productivity and greater yield, accepting a high degree of risk and uncertainty in doing so’ (Burns, 2007, 11). As discussed earlier, in large organizations, the Board of Directors, top management team and chief executive ofﬁcers (CEOs) play the role of strategic managers. In multi-business ﬁrms, strategic business unit (SBU) managers act as

130

Strategy Formulation in Entrepreneurial Firms

strategists. While in small businesses, the business-owner manager and managers who, organize and manage the business are the ultimate strategists. Business-owner managers make all strategic, as well as operational, decisions in the ﬁrm. They are simultaneously involved in all three levels of strategic decision-making processes within the ﬁrm, that is corporate, business and functional. Any manager in either a large or small ﬁrm can be an entrepreneur. Entrepreneurs can exist within both large and small ﬁrms. It is important to make it clear that, entrepreneurs are deﬁned by their actions, not by the size of ﬁrm they happen to work within. Some managers do own the ﬁrms they manage and these make up the majority of small and medium sized ﬁrms. They are called business-owner managers. Business-owner managers signiﬁcantly control the operations of their ﬁrm on a day to day basis. However, business owner-managers may not necessarily not be entrepreneurs. Many managers of small and medium-sized enterprises are employed by the ﬁrms they work for. Both business-owner managers and employed managers might be entrepreneurs, depending on the way they act (Burns, 2007). Entrepreneurs develop the vision and mission of the business in an innovative way. They formulate and implement the business strategies of the ﬁrm by bridging strategic management processes and innovation. Characteristics of Successful Entrepreneurs A great deal of research has been carried out in identifying the characteristics of successful entrepreneurs. Business-owner entrepreneurs have certain typical character traits, although the mix and emphasis of these characteristics will be different for each individual. Successful entrepreneurs are the strategists who are well motivated, ﬂexible, creative and risk takers (Zimmerer and Scarborough, 2002). They are proactive leaders and use strategic planning and organization in their decision-making process. Successful entrepreneurs are skilled managers with previous experiences in the business. They are self-motivated individuals who begin the business on their own. Often successful entrepreneurs are also self-ﬁnanced. According to Burns (2007) entrepreneurs have the following character traits: • • • • • • •

Opportunistic Innovative Self-conﬁdent Proactive and decisive with high energy Self-motivated Vision and ﬂair Willingness to take greater risks and live with even greater uncertainty

According to Analoui and Karami (2003) some of the characteristics of successful entrepreneurs are as follows: • •

Highly motivated individual Flexible and innovative

Strategic Entrepreneurship

• • • • • • • •

131

Risk taker Proactive leader Good planning and organizing skills Previous experience Technical knowledge Hard worker Self-starter Personal ﬁnancial resource

Entrepreneurs are very excited and enthused about their businesses. They are highly self-motivated, amounting almost to a driving urge to succeed in their economic goals. Successful entrepreneurs are extremely self-motivated and enthusiastic. Highly motivated individuals believe in themselves and their ability to develop the business − and they transmit that enthusiasm to others. The ability to spot opportunities and to innovate is possibly the most important distinguishing feature of entrepreneurs (Burns, 2007). Innovation is the prime tool entrepreneurs use to create or exploit opportunity. Successful entrepreneurs use innovative manners in dealing with organizational issues. They are ﬂexible, listen to their customers and adapt to meet those needs. Burns (2007) argues that entrepreneurs are willing to take far greater risks and live with far greater uncertainty. Successful entrepreneurs are risk takers but they are not gamblers. Successful entrepreneurs are aware and accept that their decisions may have positive or negative outcomes. To succeed, entrepreneurs need to have a clear vision of what they want to achieve. Successful entrepreneurs are proactive leaders. They like challenge and enjoy competing with others. They do not wait for the future with ideal conditions to react. Successful entrepreneurs inspire other people to help them achieve their goals. They also know how to monitor and supervise people to ensure that their instructions are carried out properly. Entrepreneurs develop a system for managing their time and following up on important items. Because entrepreneurs often juggle many tasks − including sales, marketing, production and paying bills − they must be ﬂexible and able to tolerate some degree of chaos. Prior experience in starting a business is one of the top characteristics shared by successful entrepreneurs. Successful and experienced entrepreneurs have a better understanding of the marketplace. They also have good business sense and make decisions based on a realistic appraisal of their business and the marketplace. Research shows that the successful entrepreneur, along side with their technical skills, have a managerial and an educated background (Hitt et al., 2002). Successful entrepreneurs have managerial and technical knowledge of their business. Entrepreneurs generally work long hours and take responsibility for the hundreds of details involved in managing their business. Successful entrepreneurs are thoroughly committed to their idea, which keeps them focused even when things do go wrong. Entrepreneurs are self-motivated people who begin projects on their own. They don’t wait for anybody’s approval or for somebody else to motivate them. They start developing their businesses based on their own vision and instincts. Successful entrepreneurs consider the impact of the business on their personal life. They explain

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the changes that the new business will bring − such as long hours or extensive travel − and develop a plan that family and friends can live with. Nature of Strategic Planning in Entrepreneurial SMEs It has been discussed by Hitt et al. (2002) that there are three traditional approaches to strategic management − competitive forces, strategic conﬂict and the resource based view. Two additional approaches have recently been introduced: structured chaos and dynamic capabilities. The intersection of entrepreneurship and strategic management is evident and logical. Meyer and Heppard (2000) believe that it is time to move beyond the ‘intersection’ and ‘integration’ conversation. They offer an alternative view – that of an interface. The entrepreneurship-strategic management interface establishes boundaries for the ﬁelds working together. Entrepreneurship is about creation and strategic management is about the process with which to achieve above-average performance via competitive advantage. In developing the conceptual framework of the research, the question, whether or not strategic management is important in SMEs, has been developed. As discussed in the literature review, proponents of strategic management in SMEs consider a strategic management approach as an important factor for increasing ﬁrm performance. They (Scott and Bruce, 1987; Berry, 1998) concluded that, the strategic management approach employed will evolve and become more formal and sophisticated over the life cycle of the business. In contrast, other writers (Shuman, Shaw and Sussman, 1985; Curran, 1996) believe that, small businesses, because of their size, nature of activities, and entrepreneurship, cannot beneﬁt from a strategic management approach, which focuses on formal strategy formulation and implementation. They emphasized on informal planning in SMEs. In this research as it has been discussed in Chapter 4, that CEO’s of high tech SMEs considered a strategic approach as an effective factor in increasing ﬁrm performance. The respondents were asked to indicate whether or not a systematic approach has been developed within their company. The data analysis shows that, the majority of the studied ﬁrms (n = 96, % 74) have established a strategic management system in their organizations. Therefore, signiﬁcant proportions of SMEs regard strategic management as important. But, there was a signiﬁcant association (γ = 0.456, p < 0.01) between the establishment of a strategic management approach within the ﬁrm and the life cycle of the ﬁrms. As the ﬁrms have grown, the strategic management processes used have become formal and explicit. Generally speaking, SMEs do employ strategic management procedures, however, the majority of SMEs tend to rely on informal methods of strategic management. Regarding the strategy formulation, it has been found that, strategic planning activities tended to be primarily concerned with the short term and are operationally orientated. These ﬁndings are very close to the ﬁndings of Berry (1998), regarding the strategic planning in high tech ﬁrms, who reported that, small high tech ﬁrms do employ strategic management. In the next section the nature of the strategic management approach on organizational variables will be discussed. Strategy, its formulation or creation

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and implementation are recognized as key aspects of the management of large organizations (Ansoff, 1984). As noted in the literature review, small and mediumsized enterprises are urged to perform business, strategic, and succession planning for their survival (Ward, 1988; Bridge and Peel, 1999; Chan and Foster, 2001). However, most of the research on SMEs business planning focuses on succession planning rather than on business or strategic planning (Handler, 1994; Upton and Heck, 1997). The question that has been raised is, whether or not CEOs in studied ﬁrms employ strategic planning processes. Consequently if they do so, what is the nature of such strategic planning activity in small and medium-sized enterprises? Some authors are sceptical of the existence of clearly visible strategic planning in many small business settings (Curran, 1996). In practice, some small businessmen may simply keep doing what they have done of late, assume market conditions will continue much as before and hope for the best. The sceptics may see this as an absence of strategy. Despite some research into the relative success of pursuing active policies of formal strategic planning or strategy formulation (Armstrong, 1982) there has been relatively little study of the situation in small businesses. The available research suggests that while SMEs should perform strategic and business planning, most do not (Brown, 1995; Rue and Ibrahim, 1996). Greenwald and Associates (1993), in a national survey of 614 small businesses, found that 58 per cent of those businesses had no written business plan. In a 1997 a survey of 3,033 small businesses (Andersen and Mutal, 1997) it was discovered that 69 per cent had no written strategic plan. In this study, referring to the descriptive analysis of the data (Chapter 6), it has been found that, the majority (83 per cent) of the studied ﬁrms employ planning activities. The nature of those employed planning activities varied from basic ﬁnancial planning to formal strategic planning. This result supports the ﬁndings of Rue and Ibrahim (1996) who noted that SMEs engage in more planning than previously thought, with over half of their sample reporting written long-range plans, and 97 per cent reporting some speciﬁc plans related to growth. Ward (1997) also concludes that SMEs may not plan if the founder is ﬁxated on a previously successful strategy. Apart from these two researches, the ﬁndings of this study are very similar to the ﬁnding of the recent study (Berry, 1998) that reported that, successful SMEs do employ strategic planning. The results of this research also conﬁrm the ﬁndings of Goodwin and Hodgett (1991) who concluded that, strategic planning brings major beneﬁts to the companies that use it. However, many medium size companies confuse it with long-term budgeting and miss out on its beneﬁts. Goodwin and Hodgett’s (1991) study, which examined the planning practices of 300 medium size companies in Australia, revealed that over 86 per cent of all the responding companies do prepare a strategic plan. Their study, attempted to identify the type of planning activities, and planning characteristics employed by the studied ﬁrms. Based on the ﬁndings of the study (see Chapter 4), the studied small and medium-sized enterprises can be categorized in to four groups (see Table 5.1) in terms of employing strategic planning. First the ﬁrms which, are not involved in planning activities (17 per cent). In these ﬁrms, there are no planning activities reported, accordingly there are no mission or objectives, either short term or long term, developed. Second, the ﬁrms which employ ﬁnancial

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planning (21 per cent). In this group, respondents rated formal ﬁnancial planning as an essential activity. The CEOs stressed the importance of tight ﬁnancial controls and performance. It also has been found that, the ﬁrms develop short-term (up to one year) to medium-term (up to two years) ﬁnancial objectives.

Table 5.1

Planning levels and characteristics of the studied ﬁrms

Planning level

Characteristics

Non planning (17%)

Planning Characteristics: No mission statement No long term objectives Less stress on short term objectives No formal or informal business plan Firm size: less than 10 employees Top management is not experienced but technically qualiﬁed

Financial planning (21%)

Planning Characteristics: Emphasis on short to medium term 1 up to 2 years ﬁnancial objectives Stress on ﬁnancial controls Strategic planning is not important Review the ﬁnancial performance every one to three months Firm size: Less than 100 employees Top management: may have some experiences but technically qualiﬁed, in some cases management training

Formal ﬁnancial and informal strategic planning (38%)

Planning Characteristics: Emphasis on long term (2 to 5 years) ﬁnancial objectives Stress on importance of strategic planning Informal mission statement Informal strategic objectives Firm size: 100 to 200 employees Top management: have previous general management experiences, technically qualiﬁed, have had management training,

Formal strategic planning (32%)

Planning Characteristics: Emphasis on long term objectives in relation to products or markets Written mission statement Stress on importance of formal strategic planning Reviewing strategic plans every six months or one year Firm size: 200 to 250 employees Top management: have wide range of previous general management experiences, Multi-disciplinary (marketing, technology, ﬁnancial, strategic) management team

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The ﬁrms in this group were not engaged in strategic planning. Third group includes formal ﬁnancial and informal strategic planners (38 per cent). Respondents in this group, believed in the importance of informal strategic planning. While ﬁnancial planning and performance are tightly controlled and monitored. The ﬁrms have had a mission statement and long-term ﬁnancial objectives speciﬁed over a two to ﬁve years planning horizon. In this group of the studied ﬁrms, mission statement, objectives and business strategies are not formalized in a business plan but are clearly communicated and known throughout the ﬁrms. Finally, the fourth group of ﬁrm can be categorized as formal strategic planners (32 per cent). In this group management stressed the importance of formal and explicit strategy formulation process, written mission statement and long term objectives over a two to ﬁve years planning horizon. A formal and written strategic plan was produced and reviewed on a six monthly or annual basis. In these ﬁrms, formal strategic business plans are developed reﬂecting the management perception that signiﬁcant beneﬁt will arise for the company. The relationship between employing a strategic management approach and some of the selected organizational factors will be discussed in the next sections. Strategic Management Approach and Organizational Factors In order to see the impact of a strategic management approach on organizational variables within the studied ﬁrms, the respondents were asked to rate its impact on the research variables such as adapting with environmental changes, operational decision making, developing and implementing business plans, and so on. The results of the T-test have been illustrated in Table 5.2. It has been discussed that, the success of SMEs within globalization depends in large part on the senior managers’ awareness of the environment (Miles and Snow,

Table 5.2

Impact of strategic management approach on organizational factors*

Variable

t-statistics

P-value

Association

36.659 34.903 39.782 40.943 18.695 19.860 39.590 18.804 21.138 39.661 39.774 38.873

P<0.01 P<0.05 P<0.01 P<0.01 P<0.05 P<0.01 P<0.05 P<0.01 P<0.05 P<0.01 P<0.01 P<0.01

Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant Signiﬁcant signiﬁcant

Adapting with environmental changes Operational decision making Developing business plans Implementing business plans Quality of product or services Solving organizational problems Employees satisfaction Changing organizational culture Reducing organizational conﬂict Firm’s proﬁtability Achieving organizational objectives Organizational effectiveness * : Mean Importance Rating 3 : Mean Importance Rating < 3 (Scale: 1 = Low; 3 = Average; 5 = High)

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1978; Roy and Dugal, 1999; Beal, 2000). Strategy reﬂects the ﬁrm’s short- and longterm responses to the challenges and opportunities posed by the business environment. Companies execute strategies to attract customers and deal effectively with a myriad of environmental concerns, such as competitors, suppliers, and scarce resources. Data analysis shows that, the impact that the strategic management approach has on how a ﬁrm adapts to environmental changes is signiﬁcantly important (t (130) = 36.659, P < 0.01). Companies which establish a strategic management approach, are more adaptable to the environmental factors such as technological changes. Using environmental analysis as a basic strategic activity, the ﬁrms can recognize their strengths and weaknesses, alongside the opportunities and threats of the industry, in order to choose the proper strategies. Furthermore, it has been found that the ﬁrms are proactive to the environmental changes, when they use innovative lens for establishing strategic management. This ﬁnding supports the strategy lenses model developed by Johnson, Scholes and Whittington (2005) who discuss that there are many different views on how strategy should be understood, developed and implemented in organizations. They used strategy lenses for explaining three different ways of looking at the issue of strategy development for an organization. These are including: • • •

Strategy as design Strategy as experience Strategy as ideas

The design lens views strategy development, as the deliberate positioning of the organization through a rational, analytic, structured and directive process. The experience lens views strategy development as the outcome of individual and collective experience of individuals inﬂuenced by organizational culture. While, the ideas lens sees strategy as the emergence of order and innovation from the variety and diversity which exist in and around an organization. Strategic decision-making is an important part of managing the direction of an organization and measuring its success (Waring, 2001). The recent works focus on the development of the strategic decision making as a management tool, and explores various analytical techniques to measure the performance of an organization. The development of such a model requires a more effective use of the strategic management approach in small businesses. In this research, the result of data analysis reveals that, establishing a strategic management approach, signiﬁcantly (t(128) = 34.903 P < 0.05) impacted on the operational decision making in the studied ﬁrms. Regarding the developing and implementation of business plans, it has been discussed that, enterprise strategy provides an accepted theoretical framework for integrating the moral responsibilities of organizations into their strategy formulation and implementation processes (Stead, 2000). Recently, the concept of an integrated strategy, developed by Breene and Supron (see Copacino, 1999), has gained attention. Integrated strategy draws on the collection of analytic frameworks described above, while also emphasizing both strategic positioning and superior execution capabilities. Most signiﬁcantly, integrated strategy has created a doctrine or set of principles to guide the processes of strategy formulation and implementation.

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Some recent researches (Flores and Saxena, 2000; Hoskisson, 2000) reveal some major shortcomings in the way managers are approaching strategy formulation and implementation. In this research, the ﬁndings of the data analysis illustrates a signiﬁcant impact on establishing a strategic management approach for developing business plans (t (128) = 39.782, P < 0.01), and implementing business plans (t (124) = 40.943, P < 0.01) in the studied ﬁrms. These ﬁndings are similar to the ﬁndings of Copacino (1999) who stated that, senior managers widely recognize the importance of strategic management nowadays, and no wonder, if they are to cope with the sweeping forces of change, then institutions must fashion strategic planning into a powerful tool. They must use organizational resources and build new competencies, all in a way that capitalizes on emerging opportunities and contends with competitive threats. Generally speaking, we are witness to emphasis now being placed on the importance of developing strategic orientation, as well as simple strategic planning, by chief executive ofﬁcers (CEOs) and top management teams in the organizations. For instance, Peter Duncan Vice-President of the Centre for Simpliﬁed Strategic Planning, Inc. in his recent work (Duncan, 2001) indicates that: “In time of great changes, great vision and plans are needed. So how do we create great vision and plans to soar to new heights? It all comes down to having a concept-an idea that a business can pursue. By some means, you identify a real need in the market not a whim or wish, but something that will deliver real value (where the customer’s perception of return is greater than their cost). And from that simple concept, you build a vision of what you need to put in place to deliver that market need better than anyone else” (Duncan, 2001).

The other interesting ﬁnding of this research is the signiﬁcant impact of the establishment of a strategic management approach on the internal environmental variables of the studied ﬁrms. For instance, CEOs believed that, using strategic management processes in SMEs signiﬁcantly helps in solving organizational problems (t (129) = 19.860, P < 0.01), and reducing organizational conﬂict (t (128) = 21.138, P < 0.05). Strategy as a uniﬁed plan (Mintzberg, 1994) integrates all of the parts of the ﬁrm together and links the subsections of the ﬁrm to each other effectively. Based on the ﬁndings of the data analysis, the respondents believe that, a strategic management approach signiﬁcantly impacts on employees’ satisfaction (t (129) = 39.590, P < 0.05), and changing organizational culture (t (126) = 18.804, P < 0.01). These ﬁndings support the ﬁndings of Ahls (2001). He concludes that, just as a vision and strategy are important to a company as a whole, they are essential to a change effort. By deﬁnition, change represents something different from what employees are accustomed to; therefore, a clear, well-communicated vision and a path to achieve the change are needed. Asking employees to change must be paired with giving them the tools to achieve it and removing all obstacles. Careful strategic planning will ensure that all aspects of the ﬁrm have been accounted for and that unexpected roadblocks will be avoided or minimized (Ahls, 2001). Finally, the impact of employing strategic management on ﬁrm performance is the subject that has been investigated in this research. The ﬁndings of the data analysis (see Chapter 6) support the signiﬁcant impact of a strategic management approach on the overall ﬁrm performance. In this regard CEOs believed that,

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employing strategic management procedures in the studied ﬁrms signiﬁcantly impacted on the quality of their product or services (t (131) = 18.69, P < 0.05), achieving organizational objectives (t (128) = 39.774, P < 0.01), ﬁrm proﬁtability (t (130) = 39.661, P < 0.01), and overall organizational effectiveness (t (128) = 38.873, P < 0.01). Generally speaking, these ﬁndings are similar to the ﬁndings of previous researches (for example Handler, 1994; Berry, 1998; Chan and Foster, 2001). They concluded that, the success of SMEs depends in large part on the formulation and implementation of strategy. Business-owner Entrepreneurs and Strategic Planning Strategy and organizational researchers seem to vary in the extent to which they adopt an adaptive or inertial view of strategic change, although the two perspectives can be viewed as poles on a continuum (Astrachan and Kolenko, 1994; Anderson, 1997; Bennett, Ketchen and Schultz, 1998). Those who argue for the predominance of strategic adaptation emphasize the role that managers play in monitoring environmental changes and modifying organizational strategy to better match environmental contingencies (Barry, 1998; Analoui, 2000). Past researches have typically not empirically examined organizational effectiveness as a function of the combined effects of organizational performance and managerial characteristics. More importantly, it has been argued (Analoui, 2000) that managerial characteristics interact with organizational performance to create a context through which strategic changes become particularly likely. This section discusses the ﬁndings of the data, which was analysed in Chapter 4, on managerial characteristics of the business-owner managers, and strategy, which refers to the strategic management process in SMEs. As was discussed in the literature (Chapter 2), in previous researches it was suggested that, when undertaking strategic planning, companies should form planning groups to oversee the process. In this study, respondents were asked: who or what group are involved in preparing the strategic business plans? The responses are summarized in Table 5.3. While forming strategic planning groups has frequently been adopted by large companies (Goodwin and Hodgett, 1991; Curran, 1996; Copacino, 1999), in the current research there was Table 5.3

Senior managers’ involvement in strategic planning

Groups

Percentage

Senior managers

76

Middle managers

14

Strategic planning groups (Committees)

6

Consultants

2

Other

2

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little evidence that small and medium size companies in the UK frequently form such groups (2 per cent). As can be seen, few SMEs create formal planning groups or committees to prepare the strategic business plans. In addition, there was little support given to the suggestion that consultants are frequently used (2 per cent). The use of consultants for preparing strategic plans in the studied ﬁrms appears to be very limited. In contrast, it is interesting that the involvement of the senior management group in accepting responsibility for the process is strong. The majority of the respondents (76 per cent) reported that, senior managers or top management are involved in preparing strategic plans in the studied ﬁrms. There was, however, little evidence of middle management being the initiators of the strategic planning process (14 per cent). It is concluded that, in the UK small and medium size companies, senior management are mainly involve in preparing strategic business plans. This ﬁnding recalls the work of Goodwin and Hodgett (1991) who conclude from an empirical research in Australia that, senior managers are those who drive the process of strategic management and if changes to current practices are to be encouraged, it is this group that should be targeted rather than middle management. Managerial Characteristics and Strategy Development Some researchers suggest that a high level of management quality and managerial characteristics, measured in terms of capabilities, skills and expertise, age and education is more common among successful than unsuccessful ﬁrms (Hambrick and Mason, 1984; Leonidou, Katsikeas and Piercy, 1998; Analoui, 2000). In this section the role of senior managers in the strategic management processes within small and medium-sized enterprises will be explored. Consequently, the ﬁndings of this study in managerial and ﬁrm characteristics and their relationship to the ﬁrm performance are discussed. Some of the managerial and ﬁrm-characteristics examined are: age, educational level and background, and strategic awareness of the managers in small and medium-sized enterprises. Age Age is expected to be inversely related to risk taking and to the value placed on risk. Younger CEOs may pursue risky strategies (Hambrick and Mason, 1984). Studies by Child (1974) and Norburn and Birley (1988) indicate that younger CEOs show superior performance. Younger managers are also expected to be better educated and have more current technical knowledge (Bantel and Jackson, 1989). As ﬂexibility decreases, rigidity and resistance to change increase, and risk-taking propensity are expected to decrease with age (Wiersema and Bantel, 1992). The age of managers has been proposed as a predictor of differences between ﬁrms in terms of performance in general and developing business strategies in particular. In order to examine this relationship ﬁrst it has been assumed that younger managers have a more complete

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knowledge of the strategic orientation required for the development of the strategies of the company, than do the older senior managers. As discussed in Chapter 6, there was no signiﬁcant correlation between the age of respondents and pursuing a strategic orientation in the ﬁrms (γ = 0.70: p > 0.05). In other words, the ﬁrms which pursue a strategic orientation are run by either younger or older managers. As it is shown in Table 5.4 the result of the ANOVA F-test also, F(41,91) = 2.180; (p > 0.05) conﬁrms that, having strategic orientation by the ﬁrms was not statistically different among the ﬁrms being run by younger managers and those ﬁrms that were being run by older managers. So the null hypothesis that the ﬁrms run by younger managers have more strategic orientation in developing business strategies is accepted with an F-value of 2.180 (p = 0.129). A managers’ age has also been perceived as closely associated with the manager’s level of risk tolerance (Roux, 1987). In other words, younger managers are more likely to accept risk than older managers. So the risk acceptance behaviour of the managers could have an impact on the development of more aggressive strategies in the ﬁrm. The discussion here is, whether or not there is any signiﬁcant relationship between the age of senior managers and pursuing risky and innovative strategies in SMEs? One study investigating the impact of this variable on export expansion, however, produced no signiﬁcant results, while another study conﬁrmed the positive relationship between age and risk tolerance (Gomez-Mejia, 1988; Berry, 1998). Younger managers were also assumed to pursue more risky strategies than older managers. As discussed in Chapter 6, a signiﬁcant correlation (γ = 0.81: p < 0.01) has been found between the age of CEOs and the pursuit of more risky and innovative strategies in the studied ﬁrms. In addition, using one-way analysis of variance, it has been found that, the ﬁrms run by young senior managers would be more likely to pursue risky and innovative strategies than ﬁrms with older managers would. Therefore, the result of ANOVA Table 5.4

ANOVA table for age of respondents

Source of Variation Having strategic orientation Between groups Within groups Total

Sum of Squares

d.f

Mean Square

F-value

P-value

28.571 113.088 141.659

41 91 132

2.012 1.245

2.180

0.129

Risk tolerance Between groups Within groups Total

34.623 128.962 163.585

32 99 131

3.563 2.987

3.417

0.004

Performance Between groups Within groups Total

38.194 147.685 185.879

33 98 131

1.157 1.507

0.768

0.804

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(see Table 5.4) F-value 3.417 (P = 0.004) conﬁrms the signiﬁcant relationship between variables. Many international business scholars regard innovative and risky orientation as an important factor in the initiation of strategy development (Jones, 1982; Knight, 1993). In this context, managers in SMEs are expected to be more innovative, creative, and willing to break away from the existing norms and patterns of behaviour within the company, compared with their counterparts in large ﬁrms. This result supports the ﬁndings of previous research (Cavusgil, 1982; Dichtl et al., 1990) which concluded that young managers are more likely to inﬂuence export activity and select risky strategies in the stages of internationalization. It has been posed that the ﬁrm performance is related to the age of the CEOs. It has been assumed that, the ﬁrms that are run by younger managers are more successful than those ﬁrms that are run by older managers. The correlation analysis of the data show that, there were no signiﬁcant correlation (γ = 0.37p> 0.5) between age of the managers and performance of the studied ﬁrms. Firm performance is not associated to the age of the senior manager. Using analysis of variance technique (see Table 5.4) the above hypothesis has been rejected F(33,98) = 0.768 (p = 0.804). It is notable that, accordingly, the above hypothesis was not strongly validated by the previous empirical researches (Leonidou, Katsikeas and Piercy, 1998; Kakabadse, 1999). The ﬁndings of this research support the ﬁndings of the recent research in managerial age and performance (Kakabadse, 1999; Chan and Foster, 2001). Kakabadse (1999) concluded that: Indeed, it is the older manager who makes the most of his or her people, and who fosters continuous, effective performance. Younger managers are seen as ambitious and more concerned with the immediate. The challenge of working in today’s ﬂatter organizations demands resilience and wisdom − characteristics more often associated with the experienced manager. Many employers, however, are ignoring the value of older managers. Separately, research shows that quality of management, communication, clarity of vision and ability to relate within a team and across the organization are no different according to gender. Generally speaking, it is concluded that, younger senior managers do not have a more complete knowledge of the strategic orientation for developing the strategies of the company than older senior managers. But the ﬁrms run by younger senior managers would be more likely to pursue risky strategies than ﬁrms with older managers. Younger senior managers are more inclined to develop novel and innovative strategies than older managers. Finally, the ﬁrm performance is not signiﬁcantly related to the age of the CEOs. Working Experiences The professional experiences of the managers, in terms of previous occupations, technical expertise, or product knowledge, have been associated with ﬁrm performance. This is particularly important when professional experiences were attained in a strategy setting, through involvement in hi-tech SMEs. This was based on the assumption that, senior managers with managerial work experiences place more weight on formal strategy development than those senior managers who lack

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managerial work experiences. The data analysis shows that, there is a strong and signiﬁcant correlation (γ = 0.76; p < 0.1) between the professional expertise of the CEOs and emphasis on formal strategy development in SMEs. This result has been conﬁrmed by ANOVA result (F(5,126) = 3.68; p < 0.01) which has been shown in Table 5.5. In other words, CEOs with professional expertise and managerial work experiences put more emphasis on formal strategy development than the CEOs without such work experiences. This result supports the ﬁndings of previous studies which concluded that, such managerial work experience exposes the managers to information and contacts relating to foreign markets and the development of business strategies (Reid, 1983), enriches managerial expertise and increases the ﬁrm’s aggressiveness and performance in overseas markets (da Rocha, Carl and da Cunha, 1990).

Table 5.5

ANOVA table for CEOs’ experiences and education Parametric Test

Non-Parametric Test

ANOVA

Kruskal-Wallis Test

Formal Strategic Planning F-Value Sig. Level -Value Asymp. Sig. V.I 3.681 P<0.01 V.II 0.266 P<0.05 V.III 5.488 P<0.05 Firm Performance F-Value Sig. Level -Value Asymp. Sig. V.I 2.892 P<0.05 V.II 1.221 P>0.05 V.III 6.302 P>0.05 V.I. Respondents’ professional years of experiences V.II. Educational background of the respondents (Management and Business Studies) V.III. Educational level of the respondents

Regarding the work experiences of the CEOs and ﬁrm performance, it has been assumed that, there is a signiﬁcant association between variables. Running correlation analysis it has been found that the managerial work experiences of the managers within the industry signiﬁcantly (γ = 0.67; p < 0.05) impacts on the ﬁrm performance. This result has been conﬁrmed by ANOVA result (F(4,127) = 2.892; p < 0.05). This result is very similar to the results of previous researches (Chan and Foster, 2001). Schell (1996) in answer to the question, what is the number one determinant of the entrepreneur’s success?, they explain that, “The number one determinant of your success is you. The entrepreneur. The chief enchilada. The big kahuna. It’s fact that, the decisions you made and the directions you take place you light years ahead of whatever the number two determinant is” Schell (1996, 7).

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By and large, it can be conclude that, senior managers with managerial work experiences place more weight on formal strategy development than those senior managers who lack of managerial work experiences. The ﬁrms that are run by managers with long work experience are more successful than the ﬁrms, that are run by managers who lack or who have short work experience. Education Both the level of formal education and the type of education (business or nonbusiness) provide us with some measure of an individual’s knowledge and skill base (Hambrick and Mason, 1984; Hitt and Tyler, 1991). CEOs with higher levels of education and with business degrees are expected to generate a wider range of creative solutions when faced with complex problems. Level of education has been linked to ﬁrm performance (Norburn and Birley, 1988), degree of ﬁrm innovation (Bantel and Jackson, 1989), and change in corporate strategy (Wiersema and Bantel, 1992). The levels of formal education attained by managers and their educational background have been suggested as factors affecting the strategy development process. Some scholars have hypothesized that better educated decision makers are more likely to be open-minded, interested in foreign affairs, and willing to objectively evaluate the beneﬁts accruing from international business (Garnier, 1982). Others have claimed that higher-level education is vital for success in overseas operations, since it enhances management knowledge and capabilities (Schlegelmilch and Ross, 1987). This managerial factor has received particular empirical attention in the extant literature. In this research it has been found that, companies whose senior managers have management educational backgrounds are more inclined to develop strategic plans than those managers have not had such an educational background. The hypotheses validated by using statistical analysis by ANOVA result (F(1,129) = 0.266; p < 0.05). It has also been found that a signiﬁcant correlation (γ = 0.81; p < 0.01) exists between managers’ educational background and emphasis on strategy development in the studied ﬁrms. Where the ﬁrms were run by senior managers without a management educational background, longer strategic plans are unlikely to be initiated within the ﬁrm. It also has been found that, senior managers with a management educational background place more weight on opportunities and less weight on threats than those managers have not had such an educational background in small businesses. It has been hypothesized that, there is a signiﬁcant relationship between the educational level of the managers and ﬁrm performance in SMEs. In this regard the analysis of the data show that, there was no signiﬁcant difference (= 6.302; p > 0.05) between ﬁrms which were run by more and less educated managers in terms of performance. This ﬁnding is very similar to the ﬁndings of Koh (1991) and Chan and Foster (2001). One explanation would be the relation between the age and education level of respondents. As discussed in the data analysis chapter, older managers are likely to have less education. While the younger managers are likely to have more education. In other words, managers with less industry experience are younger and, very likely, better educated. They are therefore more knowledgeable and prepared to

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break away from their immediate circle to ﬁnd appropriate information. In contrast, the managers with less education are older. The ﬁndings in this section conﬁrms the ﬁndings of the relationship between age and ﬁrm performance. The discussion in this section could be summarized as, managers with a management educational background put more emphasis on developing strategic plans in small businesses; and ﬁrm performance in small businesses is not signiﬁcantly related to the educational level of managers. Strategic Awareness of the Managers Burns (2007) argues that a prerequisite to all creative processes is the generation of awareness of different ideas and ways of doing things through reading and travelling widely, and talking with different people with different views about the world. In an entrepreneurial ﬁrms’ context, this is to be placed in the context of environmental scanning and strategy development. It may be important to develop managers’ awareness of how what they do can matter at the strategic level. Particularly in fast-changing conditions successful ﬁrms may be those that have developed the dynamic capabilities to continually readjust the required competences. In effect their competences become that of learning and development. Therefore, the strategic awareness becomes more important in developing strategy in entrepreneurial ﬁrms. The awareness of strategic issues is not necessarily an analytical process; rather, managers get a ‘gut feeling’ based on their previous experiences or received wisdom (Johnson, Scholes and Whittington, 2005). They argue that this awareness incubates as various stimuli that help to build up a picture of the extent to which circumstances deviate from what is normally to be expected, perhaps in terms of internal performance measures such as proﬁt performance or perhaps as a reaction to the quality of products and services. Strategic awareness may result in creativity. It reduces blocks to individual creativity in spotting opportunities and developing strategy. Von Oech (1998) identiﬁed 10 blocks to individual creativity. These include: • • • • • • • • • •

The belief that there is only one solution to a problem The fallacy that logic is important in creativity The tendency to be practical The tendency to follow established rules Avoiding ambiguity in viewing a problem The tendency to assign blame for failure The unwillingness to recognize the creative power of play The tendency to think too narrowly and with too much focus The unwillingness to think unconventionally because of the fear of appearing foolish The lack of belief that you can be creative.

Increasing strategic awareness may result in the realization that they have these blocks and then dismantling them. In this research it has been assumed that, the strategic awareness of the managers is signiﬁcantly correlated to determining the

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strategic orientation of the company. As discussed in Chapter 4, it has been found that, 74 per cent of the studied ﬁrms reported that a strategic management system had been established in their ﬁrms. So the association between managers’ awareness of the importance of strategic management and establishing such a system was targeted in this section. Using the t-test results (see Table 5.6) it has been found that, the environmental awareness of the managers in SMEs is signiﬁcantly (tstatistics = 35.873, p-value < 0.00) important. The respondents considered the external opportunities as extremely important (t-statistics = 23.515, p-value < 0.00) while they considered the external threats below average (t-statistics = 54.423, pvalue > 0.05). Therefore, the association between the strategic awareness of the managers and establishing a strategic management system within the studied ﬁrms was signiﬁcant. It is notable that, where a strategic management system had been established in the ﬁrm, those CEOs considered environmental awareness as an important factor. So, the strategic awareness of the senior managers signiﬁcantly impacts upon the establishment of a systematic approach to strategic management within those ﬁrms. The other assumption that has been made is the association between the strategic awareness of the managers and strategic planning. The data analysis in Chapter 4 shows that, the strategic awareness of the CEOs plays an important role in the formulation of the business strategies (γ = − 0.79; p < 0.01). Where the CEO exhibits a distinct lack of strategic awareness, they do not emphasis on formal strategic planning. Further analysis using T-test (t (131) = 42.534, P < 0.01) conﬁrms this result. This ﬁnding is similar to the ﬁndings of previous researches (Chan and Foster, 2001). Finally, it is contended that CEOs ought to be assisted (trained) to develop a wider awareness of the importance of the environment and market in which their ﬁrms operate. Therefore, providing the necessary ﬂexibility within their

Table 5.6

Strategic awareness of respondents, results of t-test*

Variable Establishing strategic management system Environmental awareness of the managers Formal strategic planning External opportunities External threats Internal strengths Internal weaknesses Management training

d.f

tstatistics

Mean difference

131

28.352

3.41

0.003

130 131 129 131 128 129 131

35.873 42.534 23.515 54.423 31.523 43.456 19.423

3.22 3.14 4.32 1.98 4.18 3.72 4.19

0.001 0.003 0.000 0.095 0.000 0.002 0.000

* : Mean Importance Rating 3 : Mean Importance Rating < 3 (Scale: 1 = Not Important; 3 = Important; 5 = Extremely Important)

Pvalue

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strategic organizational decision-making processes will enable prompt and proactive responses to changes in the environment. Managing Resource Capabilities As it has been discussed earlier, the resources-based view (RBV) of the ﬁrm is traceable to early classic management treatises. The basic insights of the resourcebased view of the ﬁrm are well known. The resource based view of the ﬁrm argues that the ﬁrm is best viewed as a bundle of resources or factors of production that management must deploy systematically to add value (Boxall, 19,960). Perhaps the signiﬁcance of the resource-based view of the ﬁrm was recognized when Wernerfelt’s work (1984) ‘A Resources-based View of the Firm’ was selected as the best 1994 paper published in the Strategic Management Journal. Chandler (1977); Nelson and Winter (1982), Barney (1986), Teece (1988, 1989) and Teece, Pisano and Shuen (1994) contributed to this theory with their remarkable work. The RBV emerged as ‘an important new conceptualization in the ﬁeld of strategic management’ and is ‘one of the most important redirections of the strategic research in this decade’ (Zajac, 1995, p. 169). The central promise of RBV addresses the fundamental question of why ﬁrms are different and how ﬁrms achieve and sustain competitive advantage. Extending the original work, researchers have attempted to explain more speciﬁcally how differences in ﬁrms’ resources realize superior ﬁrm performance. Barney (1986) presents a more concrete and comprehensive framework to identify the needed characteristics of ﬁrm resources in order to generate a sustainable competitive advantage. Johnson et al (2005) consider such resources as unique resources. Four criteria are proposed to assess the economic implications of the unique resources: • • • •

Value Rareness Inimitability Substitutability

Analoui and Karami (2003) argue that value refers to the extent to which the ﬁrm’s combination of resources ﬁts with the external environment so that the ﬁrm is able to exploit opportunities and/or neutralize threats in the competitive environment. While, rareness refers to the physical or perceived physical rareness of the resources in the factor markets. Inimitability is the continuation of imperfect factor markets via information asymmetry such that resources cannot be obtained or recreated by other ﬁrms without a cost disadvantage. Finally, the framework also considers whether the organizations are substitutable by competitors. It has been argued that the ﬁrms can rely on unique resources for the development and implementation of their business strategies (Karami et al., 2004; Johnson et al. (2005). Another extension strand of the resource-based view of the ﬁrm is the theory of dynamic capabilities. Teece, Pisano and Shuen (1994) deﬁne dynamic capabilities as the ﬁrm’s ability to integrate, build, and reconﬁgure internal and external competences

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to address rapidly changing environments. Dynamic capabilities thus reﬂect an organization’s ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions (Chan and Foster, 2001). Dynamic capabilities theory suggests that ﬁrms can accumulate knowledge, expertise, and skills through organizational learning to overcome the inherent constraints. There is an expanding stream of literature focusing on corporate learning and organizational modes that facilitate such learning. The studies (Hagedoorn and Schakenraad, 1990) view inter-ﬁrm collaboration as a vehicle for organizational learning, and moreover view knowledge accumulation and internalization via organizational learning as the motives, process and outcomes of strategic technical alliance. According to resource-based theory, a ﬁrm accumulates its own resource capability over time and this accumulation process is path-dependent. Any technological innovation requires new or speciﬁc resources which focal ﬁrm may lack and can not develop with cost efﬁciency in competitive time. Small and medium-sized enterprises are more unlikely to have the broad range of skills, assets and capabilities necessary for innovation. In these instances, inter-ﬁrm technological cooperation seems to be an efﬁcient solution for gaining complementary resources. Teece (1992, 22) argues that ‘to be successful, innovating organizations must form linkages, upstream and downstream, lateral and horizontal.’ In this research the nature and forms of the resources of the ﬁrms and their relationship with the ﬁrms performance have been investigated. As discussed earlier a hypotheses has been proposed that there are signiﬁcant differences between high and low performance ﬁrms in terms of mobilization and usage of the resources. Data analysis illustrates that both independent-sample t test and Mann-Whitney U test are used to examine the differences in ﬁrms’ resource capabilities between two group of ﬁrms. The results are presented in Table 5.7. Parametric test and non-parametric test illustrate a big difference in ρ value signiﬁcance for ﬁrm size and inter ﬁrm collaboration variables in the studied ﬁrms. Due to the skew distribution of the variables, this study adopts the results from Mann-Whitney U test and keeps the results of the independent-sample t test for comparison. The results in Table 5.7 show that the ﬁrm size of high performance ﬁrms is signiﬁcantly larger than low performance ﬁrms. It also illustrates that high performance SMEs are most likely to have inter ﬁrm collaboration with the other ﬁrms. In other words, ﬁrm size and inter ﬁrm collaboration are essential elements for ﬁrms success. The ﬁndings in this study show that ﬁrm size is the signiﬁcant factor that impacts on a ﬁrm’s propensity to cooperate among the examined resource factors. It has been found that there is a signiﬁcant relationship between ﬁrm size and the level of inter-ﬁrm cooperation within the studied ﬁrms. As ﬁrm size grows it is more likely to establish partnerships with other ﬁrms. Cooperating with partner ﬁrms would require speciﬁc capabilities and complementary resources in order to meet their partners’ requirement. Firm size determines to a higher extent what level of resource capability a ﬁrm may hold. This ﬁnding supports the result of other researches. For example, Hagedoorn and Schakenraad (1990) stress that in general larger ﬁrms have been found to be more likely to engage in alliance relationships than smaller ﬁrms. In explaining the positive effect of ﬁrm size on cooperation, Hagedoorn and Schakenraad (1990, 300) state that ‘size of ﬁrms partly reﬂects

148

Table 5.7

Strategy Formulation in Entrepreneurial Firms

The differences between high and low performance ﬁrms in terms of their capabilities T test Variable

Sig. (2tailed)

U test Exact Median Sig. (2-tailed)

Mean

S.D.

6.89 8.45

5.18 5.48

.612

7 8

.572

6.98 6.20

7.50 5.24

.118

5 4

.211

Business manager’s managerial experience High performance ﬁrms Low performance ﬁrms Firm age High performance ﬁrms Low performance ﬁrms Firm size High performance ﬁrms Low performance ﬁrms

5.27 3.74

1.47 1.57

.001

4.642 3.4

.001

.38 .46

.31 .57

.047

0.19 0.41

.053

.88 .17

.96 .30

.001

0.085 0.060

.001

Research & Development High performance ﬁrms Low performance ﬁrms Inter-ﬁrm collaboration High performance ﬁrms Low performance ﬁrms

their degree of diversiﬁcation which broadens their basis for potential cooperation with other ﬁrms, forging alliances takes substantial administrative, organizational and monitoring support (and) the support of a staff for these particular activities is usually only available to large ﬁrms.’ Innovation The current literature on managing innovation as a part of entrepreneurial management contains at its heart a contradiction. A number of authors have argued that entrepreneurial management to facilitate innovation requires a different kind of organization (Hitt et al. l, 2002). It has been discussed that (March, 1991) organizations must trade off gains in average performance through exploration against the reduction in variance in returns gained through exploitation.

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Entrepreneurial ﬁrms require a ﬂexible structure enabling them to cooperate with the other ﬁrms. In the previous section it has been discussed that as ﬁrm size grows, it is more likely be involved in inter ﬁrm cooperation in order to develop and use its potential capabilities. Theoretically, according to resource-based theory, inter-ﬁrm technological cooperation is a mechanism by which ﬁrms use external technology and information to develop innovation capabilities dynamically. Now the question is, to what extent does involvement in inter − ﬁrm cooperation may result in innovation? Is there a signiﬁcant difference in innovation performance between high performance and low entrepreneurial ﬁrms? And how inter-ﬁrm technological cooperation improves ﬁrms’ innovation performance? In this research, innovation performances, has been measured by multiple indicators namely developing new product or service, ﬁled patent and granted patent. It has been found that the ﬁrm size moderates the relationship between inter ﬁrm cooperation and innovation performance in new product, ﬁled patent and granted patent. The data analysis illustrates that entrepreneurial SMEs that have a larger employment size, coupled with engaging in cooperation, have perform better in introducing new products and creating technology patents. Again to examine whether there are differences in innovation between high and low performance ﬁrms, independent-sample t-test is employed. The results are presented in Table 5.8. The results in Table 5.8 show that high performance ﬁrms have signiﬁcantly better innovation performance than low performance ﬁrms. In other words, high performance SMEs develop and bring more new products and services to the market than low performance SMEs. They spend more ﬁnancial resources on research and development than the low performance ﬁrms do. High performance ﬁrms have more

Table 5.8

The differences between high and low performance SMEs in terms of innovation T test Variable

Sig. (2-tailed)

Mean

S.D.

6.84 5.01

5.28 4.11

P< 0.00

6.20 3.21

6.30 4.14

P< 0.00

4.58 2.39

6.12 3.67

P< 0.00

New product/service High performance ﬁrms Low performance ﬁrms R & D investment High performance ﬁrms Low performance ﬁrms Granted patent High performance ﬁrms Low performance ﬁrms

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granted patents than low performance ﬁrms. Globally, new product intensity in high performance ﬁrms is signiﬁcantly larger than in low performance ﬁrms. This result may suggest that the ﬁrms which been involved in inter ﬁrm cooperation have a stronger capability for carrying out radical innovation than the SMEs without any inter ﬁrm cooperation experiences. It can be conclude that in entrepreneurial ﬁrms, speciﬁcally those operating in the high tech sector, it is not a ﬁrm’s choice whether it should undertake technological innovation or not, the ﬁrm’s survival and growth depends on its innovativeness against its competitors. However, it is a ﬁrm’s choice to decide its innovation strategy, go-it-alone or cooperation. Empirical research on cooperative activities can provide systematic analysis results to help ﬁrms’ decision making. Empirical research into inter-ﬁrm cooperation in both resource theory and transaction cost theory framework still lags behind and leaves many aspects unclear. Furthermore, the analysis of innovation performance can be conducted by comparing the innovation performance that is supposed to have been affected by cooperation strategy to the innovation performance before adopting the cooperation strategy. This longitudinal empirical research is expected to give a better understanding of the innovation performance on adopting a cooperation strategy. Summary and Conclusion The chapter is divided into two separate but interrelated sections. In the ﬁrst section CEO’s perception of the importance of strategic management in SMEs is explored. A signiﬁcant proportion of the studied SMEs regarded strategic management as important. In the second section the role of senior managers in the strategic management processes within the studied ﬁrms is investigated. It has been found that the CEOs of the successful SMEs perceive employing a strategic management process as an important factor in running the business. A signiﬁcant proportion of the studied SMEs regard strategic management as important. It also has been found that the ﬁrms, which employ strategic management techniques, whether formal or informal, exhibit more enhanced levels of success in the formulation and implementation of business strategies than those ﬁrms which do not employ such procedures. The second objective of this chapter was to explore the role of senior managers in the strategic management processes within small and medium enterprises. In this regard, it has been found that there is a signiﬁcant relationship between senior managers’ age, work experience, educational background and strategy formulation in SMEs. It has been found that the environmental awareness of the managers in SMEs is signiﬁcantly important. Particularly, the strategic awareness of the senior managers in SMEs signiﬁcantly impacts upon ﬁrm performance. Where a strategic management system has been established in a ﬁrm, those CEOs considered environmental awareness as an important factor. So, the strategic awareness of the senior managers signiﬁcantly impacts upon the establishment of a systematic approach to strategic management within those ﬁrms.

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Chapter 6

Crafting Strategy and Environmental Context Introduction The main purpose of this chapter is to discuss strategy formulation in the SME sector. The chapter reveals some ﬁndings on the existence and nature of environmental analysis in the formulation of business strategies in the ﬁrms studied. It also covers the discussion of the effective factors associated with the formulation and implementation of strategy in the studied ﬁrms. It is useful to start by reviewing the concept of strategy. The strategy of a ﬁrm forms a comprehensive master plan stating how the ﬁrm will achieve its mission and objectives. It maximizes competitive advantages and at the same time, minimizes competitive disadvantages (Wheelen and Hunger, 1998). The typical business ﬁrm usually considers three linked and interdependent levels of strategy consisting of corporate strategy, business strategy and functional strategy. Corporate strategy, essentially and simply is deciding what businesses the organization should be in, and how the overall group of activities should be structured and managed (Thompson, 1996). It is also argued that, corporate strategy describes a company’s overall direction in terms of its general attitude toward growth and the management of its various business and product lines (Wheelen and Hunger, 1998). The second level of strategy is business strategy which is concerned with creating and maintaining a competitive advantage in each and every area of the business. It can be achieved through any one function, or a combination of several (Thompson, 1996). Business strategy usually occurs at the business unit or product level and it emphasizes the importance of the competitive position of a corporations products or services in the speciﬁc industry or market segment served by that business unit (Wheelen and Hunger, 1998). Figure 6.1 illustrates three levels of strategy. Accordingly, the third level of strategy is functional strategy. Functional strategy is concerned with functional areas of the ﬁrm such as, marketing, ﬁnancial, human resource, and research and development. It is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity (Wheelen and Hunger, 1998). It is critical that these functional strategies are designed and managed in a coordinated way, such that they interrelate with each other and at the same time, collectively allow the competitive strategies to be implemented properly (Thompson, 1996). In most cases, small and mediumsized enterprises use all three levels of strategy simultaneously. Functional strategies

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* >

!X

!

+

Figure 6.1

+

Strategy levels

support business strategies, which, in turn, support the corporate strategy. Lets start with discussion on the main elements of corporate strategy. Elements of Corporate Strategy As discussed earlier, corporate strategy explains the nature of the activities of the organization and its philosophy for existing in an industry. In practice, adding value through buying and selling businesses has been one form of corporate strategy. This has been explained in different ways. For example, Porter (1998) terms this as portfolio management. He identiﬁes three main concepts of corporate strategy: restructuring, sharing activities, and transferring skills. Restructuring occurs when businesses are acquired with the speciﬁc intent of achieving value by active intervention and improvement. Sharing activities is a value activity that is based on the component businesses using the same processes or systems. And transferring skills is managing ongoing interrelationships between the businesses (McGee, Thomas and Wilson, 2005). Johnson et al. (2005) argue that corporate strategy should answer four key questions as follows: •

•

What is the overall rationale of the corporate parent in terms of how it envisages itself enhancing the value created by the business units for its shareholders/ stakeholders? What is the logic of the mix of business units in the corporate portfolio and how does this make sense in terms of the corporate rational?

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• •

159

Whether the extent and type of diversity of the corporation are sensible given the corporate rationale and logic of the portfolio. Whether the nature of corporate control of subsidiaries is appropriate in terms of the corporate rationale, the logic of the portfolio, and the extent of diversity.

According to Johnson et al. (2005) corporate strategy, describes a corporation’s overall direction in terms of its general philosophy towards growth and the management of its various business units. It answers the question: what business are we in? Corporate strategy helps to: • • • •

Establishing investment priorities and steering resources into the most attractive business units Initiating actions to improve the combined performance of business units Improving synergy between related business units to increase performance Making decisions re diversiﬁcation.

Based on Collis and Montgomery’s (1997) framework for corporate strategy, an effective corporate strategy consists of ﬁve elements vision, goals and objectives, resources, structure, system and process, and corporate advantages that together as a system lead to a corporate advantage that creates economic value. Now let’s discuss these elements in some detail. Vision and Mission Statement It has been said that ‘if you don’t know where you are going, any road can take you there’ (Collis and Montgomery, 1997). A clear vision deﬁnes the rules for acting incrementally and opportunistically. It is better to distinguish between the terms vision and mission. Some people like to consider vision and mission as two different concepts: a mission statement describes what the organization is now; a vision statement describes what the organization would like to become (Campbell and Yeung, 1991). A manager facing an unexpected situation can take a decision after asking himself the question ‘will such an action further the company’s vision?’ Vision statements often embody the core values of the founding entrepreneur, and say something about the inspiration behind the company that would not be obvious from a reading of its business plans (Bowman and Faulkner, 1997). Strategic vision is where all acquisitions begin. Management vision of the acquisition is shared with suppliers, customers, lenders and employees as a framework for planning, discussion, decisions and reactions to change (Sirower, 1997). Sirower argued that the vision must be clear to large constituent groups and adaptable to many unknown circumstances. In addition the vision must be a continuous guide to the actual operating plans of the company. If vision does not translate into real actions, it can provoke damaging reactions from competitors (Wit and Meyer, 1998). Bowman and Faulkner indicated that ‘a vision is an image of a better future, however deﬁned; it is a state to which the company aspires, and therefore can at least logically be achieved. What happens when Komatsu succeed in encircling Caterpillar? Clearly a

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new vision needs to be adopted if the company is not to sink beneath the competitive waves, enthusiastically telling stories of past triumphs. For an ongoing sense of purpose, the mission statement is needed’ (Bowman and Faulkner, 1997, 181). Goals and Objectives of the Firm If the vision describes what the corporation wishes to become in many years’ time, an effective corporate strategy must also have a set of shorter-term goals and objectives such as to sustain a 40 per cent equity ratio. Objectives refer to speciﬁc short and medium-term quantitative targets. On the other hand goals refer to qualitative intentions to be achieved during the same time, such as to improve new product development capabilities or become a global organization (Collis and Montgomery, 1997). Bowman and Faulkner have argued that the process of setting objectives for the corporation, and subsequently for the business unit, is the process of translating the corporations strategies into speciﬁc and, if possible, measurable objectives, the achievement of which will signal that the corporation’s adapted strategies are working successfully (Bowman and Faulkner, 1997). They argued that objectives are frequently, but not always, ﬁnancial. They need not even be measurable, but obviously it helps the monitoring process if they are measurable Resources and Capabilities The most important of the three elements of corporate strategy are the available corporate resources. Based on the new resource-based view of the ﬁrm, resources are deﬁned as the set of assets and capabilities, both tangible and intangible, which, when competitively superior, scarce, and appropriable, have the potential to create value from diversiﬁcation (Collis, 1996). Commonly referred to as core competencies, the term resources actually covers a broad range of assets that can contribute to the competitive advantage of many different businesses. Resources are the critical building blocks of strategy. They determine not what a ﬁrm wants to do, but what it can do. Resources are inputs into a ﬁrm’s production process such as capital equipment, the skills of individual employees, patents, ﬁnance, and talent managers. The main resources of the ﬁrm, on which corporate strategy rests, include the assets, skills and capabilities of the ﬁrm. From another point of view the resources of the ﬁrms can be classiﬁed into, tangible and intangible resources. The different types of tangible resources consists of; ﬁnancial, physical, human, and organizational resources. In contrast, the three types of intangible resources include, technological resources, the resources for innovation and company reputation. Within the term ‘technological resources’ are contained the stock of technology such as patents, trade marks, copyright, and trademarks. Tangible and intangible resources are a critical part of the pathway to the development of competitive advantage. Resources strategic value is increased when they are integrated or combined. Before choosing any strategy, the ﬁrm must evaluate the strengths and weaknesses of its resources. Choosing an effective strategy is dependent on the ﬁrms resources.

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Resources determine the range of market opportunities that are appropriate for a ﬁrm and so have a major impact on ﬁrm scope. The most valuable resources are those that enable a ﬁrm to compete successfully in more than one market (Collis and Montgomery, 1997). The capacity of the ﬁrm to perform a task or activity is called its ‘capability’. Capabilities are the unique combination of the ﬁrm’s informationbased tangible or intangible resources and are what the ﬁrm is able to do as a result of teams of resources working together. Hitt and Ireland have argued that capabilities represent the ﬁrm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state. The glue that binds the organization together. Capabilities emerge over time through complex interactions between and among tangible and intangible resources. They are based on developing, carrying, and exchanging information and knowledge through the ﬁrm’s human capital. Thus, the ﬁrm’s knowledge base is embedded in and reﬂected by its capabilities. It is a key source of advantage in the new competitive landscape (Hitt and Ireland, 2000). Businesses The value intrinsic in a ﬁrm’s resources will only be realized if the corporation diversiﬁes in to the appropriate business − the second element of corporate strategy framework. Every effective corporate strategy must involve related business, not necessarily related in the similarity of their products, but in the sense that all draw, and directly beneﬁt from, these resources (Collis, 1996). Competition is at the core of the success or failure of the business. As Porter has discussed, competition determines the appropriateness of a ﬁrm’s activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation. Competitive strategy is the search for a favourable competitive position in an industry, the fundamental arena in which competition occurs (Porter, 1985). The business side of the corporate strategy framework refers to the industries in which a ﬁrm operates, as well as to the competitive strategy is adopts in each. Industry choice is critical to the long-term success of a corporate strategy. It has repeatedly been demonstrated that the best predictor of ﬁrm performance is the proﬁtability of the industries in which it competes (Rumelt, 1991). The set of industries in which a ﬁrm operates also inﬂuences the extent to which it will be able to share resources across its business. The notion of relatedness may be used as a surrogate for a ﬁrm’s ability to create synergy among its businesses. The particular competitive strategy a ﬁrm pursues in each industry also has an impact on corporate performance. While it may be unusual to ﬁnd a corporation that pursues exactly the same source of competitive advantage in every one of its businesses, it is important to recognize that a corporations resources are often only valuable when applied to similar generic strategies (Collis and Montgomery, 1997). As mentioned earlier, the ﬁrst fundamental determination of a ﬁrm’s proﬁtability is industry attractiveness. In any industry, whether it is domestic or international, or produces a product or a services, the role of competition is embodied in ﬁve competitive forces: the entry of new competitors, the threat from substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors. The collective strength of these ﬁve competitive

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forces determines the ability of ﬁrms in any industry to earn, on average, rates of return on investment, in excess of the cost of capital. The strength of the ﬁve forces varies from industry to industry, and can change as an industry evolves. The ﬁve forces determine industry proﬁtability, because they inﬂuence the price, costs, and the required investment of the ﬁrm in an industry. The strength of each of the ﬁve competitive forces is a function of industry structure (Porter, 1985). The ﬁve-force framework allows the ﬁrm to see through the complexity and pinpoint those factors that are critical to competition in its industry as well as to identify these strategic innovations that would most improve the industry’s proﬁtability. It directs manager’s creative energies toward those aspects of industry structure that are most important to long-run proﬁtability. Finally the framework aims, in the process, to raise the odds of discovering a desirable strategic innovation (Wit and Meyer, 1998). Structure, System and Processes The third element of the corporate strategy framework is the organizational structure, systems and processes that the corporation has in place to manage its various businesses. Collis argued that the organizational design must solve the twin problems of any corporate ofﬁce − maintaining control of delegated decision making within individual business units, and providing coherence to the entire corporation by deploying valuable resources throughout the businesses (Collis, 1996). In providing coherence to the corporation, the corporation must mobilize its valuable resources within the various businesses. The structure, systems and process of a ﬁrm determine how the organization controls and coordinates the activities of its various business units and staff functions. Collis and Montgomery argued that structure refers to the way the corporation is divided into discrete units. It describes the formal organization chart that delineates the allocation of authority inside the corporation hierarchy. Systems are the set of formal policies and routines that govern organizational behaviour. They are the set of rules that deﬁne how tasks, from strategic planning to personnel evaluation, are to be fulﬁlled. Processes describe the informal elements of an organization’s activities (Collis and Montgomery, 1997). Matching the structure to the strategy is a fundamental task of company strategists. Each of the organizational structures has advantages and disadvantages that strategists must consider when choosing an organization form. In the case of choosing an effective organizational structure Pearce and Robinson have argued that since the structural design ties together the key activities and resources of the ﬁrm, it must be closely aligned with the demands of the ﬁrm strategy (1991). Chandler, based on his researches, observed a common sequence of evolution in strategy and structure among American ﬁrms (Chandler, 1962). Most of ﬁrms began as simple functional units operating at a single site and within a single industry. The initial growth strategy of such ﬁrms was value expansion, which created a need for an administrative ofﬁce to manage the increased volume. The next growth strategy was geographic expansion, which required multiple ﬁeld units, performing in different locations. Administrative problems with regard to standardization, specialization, and inter unit coordination gave rise to the need for geographic units and for a central administrative unit to oversee them. Vertical integration

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was usually the next growth strategy. Firms remained within the same industry but perform additional functions. Problems associated with the ﬂow of information and materials among the various functions led to the functional organization, in which staff personnel developed forecasts and schedules that facilitated overall coordination. The ﬁnal growth strategy was product diversiﬁcation. In establishing a ﬁrm’s infrastructure, corporate managers have a wide array of organizational mechanisms at their disposal, from the formal boxes in an organization chart to the more subtle element of corporate culture and style (Rumelt, 1991; Pearce, and Robinson, 1991). Because every corporate a ﬁrm’s degree of diversiﬁcation from its core business affected its choice of structure. Strategy is different, there is no one optimal set of structure, systems, and processes (Collis and Montgomery, 1997). Successful corporate strategies can, therefore, look very different. There in not one right corporate strategy for all companies to adopt, but rather a fundamental logic for all managers to follow when building and deploying a set of valuable and competitively superior resources into a limited set of businesses with the appropriate organizational design. Business Level Strategy Business level strategy refers to the way strategic managers devise a plan of action to use a company’s resources and distinctive competencies to gain a competitive advantage over competitors in the market place. Business level strategy focuses on developing a ﬁrm-speciﬁc business model that will allow the ﬁrm to gain a competitive advantage. Business level strategy deals with decisions and actions pertaining to each business unit in order to make each unit more competitive in its market-place. It answers the question: How does the ﬁrm compete? As has been discussed in Chapter 2, the ﬁrm should identify its unique resources that can be the basis for competitive advantages. Hill and Jones (2004) argue that deﬁning the ﬁrm’s business is the ﬁrst step in developing a business strategy. The process of business deﬁnition entails making decisions about three main key factors: • • •

Customers’ needs, or what is to be satisﬁed Customer groups, or who is to be satisﬁed And distinctive competencies, or how customers’ needs are to be satisﬁed.

In developing a business strategy and business model, strategists use one of the four generic business strategies: cost leadership strategy, differentiation strategy, focus differentiation and focus cost leadership. Business-level strategy: an integrated and coordinated set of commitments and actions the ﬁrm uses to gain a competitive advantage by exploiting core competencies in speciﬁc product markets. Businesslevel strategies are intended to create differences between the ﬁrm’s position relative to those of its rivals. To position itself, the ﬁrm must decide whether it intends to perform activities differently or to perform different activities as compared with its rivals. There are many factors inﬂuencing business strategy (Johnson, Scholes and Whittington, 2005). Some of those important factors are as follows:

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• • • • •

The nature of the competitive environment, stable, mature or fast changing? What is specially valued by customers? Does the ﬁrm have competencies which allow it to deliver the desired competitive strategy? Does the ﬁrm have a sustainable competitive advantage or might competitors quickly be able to imitate, or improve on them? Are there constraints placed upon the choice of competitive strategy? For example, stakeholder expectations.

When choosing an effective business strategy two aspects of the competitive environment have to be considered. First, the source of competitive advantage: differentiation or low cost, and second, the competitive scope of the target customer: broad target, narrow target. As has been discussed earlier, each of these strategies can be applied in particular circumstances. Table 6.1. Illustrates commonly required skills and resources and also common organizational requirements.

Table 6.1

Generic business strategies

Generic Strategy

Commonly Required Skills & Resources

Common Organizational Requirements

Cost leadership

•

• •

• • • • Differentiation • • • • • •

• Focus

• •

Sustained capital investment & access to capital Process engineering skills Intense supervision of labor Products designed for ease in manufacturing Low cost distribution system Strong marketing abilities Product engineering Creative ﬂair Strong capability in basic research Reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels Combination of the above Policies directed at the particular strategic target

• • •

•

•

• •

Tight cost control Frequent detailed control reports Structured Firm and responsibilities Incentives based on meeting strict quantitative targets Strong coordination among functions in R&D, product development, and marketing Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labor, scientists, or creative people

Combination of the above Policies directed at the particular strategic target

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Effective Strategy Formulation and Implementation Process in SMEs It has been argued that strategy is the outcome of a formal planning process and that the ultimate decision makers play the most important role in this process. This approach suggests that a ﬁrm’s strategy is the result of a highly structured plan. Johnson et all (2007) termed this as design lens. Hill and Jones (2004) developed a model of the strategic planning process. They argue that the formal strategic planning process has ﬁve main steps. These steps are as follows: Select the corporate mission. Analyse the organization’s external environment. Analyse the internal environment of the ﬁrm. Select strategy that build on the organization’s strengths and correct its weaknesses. 5. Implement the strategy. 1. 2. 3. 4.

In Chapter 2 the task of developing a mission, analysing the external and internal environment of the ﬁrm and selecting an appropriate strategy, which is referred to as, strategy formulation, was discussed. In contrast, strategy implementation involves putting that strategy into action. Recently, the formal strategic planning model have been criticized. Hill and Jones (2004) have summarized the main reasons for criticizing formal planning process as follows: • • •

The unpredictability of the real world The role that lower managers can play in the strategic management process, and, The fact that many successful strategies are often the result of serendipity, not rational strategizing.

Amongst those who criticized formal strategic planning, Mintzberg’s model is widely cited in the literature. His model of strategy development provides a more comprehensive view of strategy. According to his model, the ﬁrm’s realized strategy is the product of whatever planned and/or intended strategies, are actually put into action and of any unplanned, or emergent strategies (Hill and Jones, 2004). Herzberg maintains that emergent strategies are often successful and may be more appropriate than intended strategies. Apart from nature of the strategy whether formal of informal, this research targets the factors, which are associated with effective strategy formulation and implementation in entrepreneurial ﬁrms. These include mission and objectives, formal or informal strategic planning techniques, ﬁrm size, factors determining industry strength and competitive advantages of the ﬁrm, human resources involvement in strategy development, and ﬁrm performance.

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Strategic Planning Tools This section discusses the employment of some of the activities in strategy formulation and implementation within the studied ﬁrms. The respondents were asked to rate the degree of emphasis for each of the following indicators: mission statements, trend analysis, competitor analysis, long range plans, annual goals, short term action plans, ongoing evaluation, standard operation procedures (SOP), ﬂexibility and adaptability of plans and ﬁnally, the importance of employees in strategy implementation. Summary statistics for the variables shows that, respondents placed the most emphasis on annual goals, followed by long-term goals, the mission statement, and action plans. Trend analysis and competitor analysis received the two lowest results from the respondents. The respondents considered standard operation procedures, ﬂexibility of the plans, and human resources as important factors in implementing business strategies. The variability of the means, standard deviations, and correlations among these variables suggests that more discussion is required. So the next sections of the chapter provide the details of ﬁndings and discussion on the studied variables. Developing Mission Statement and Objectives in SMEs The contents of the mission statements in large and small ﬁrms have been analysed using different approaches. Table 6.2 illustrates a sample of studies in identifying and analysing the components of mission statements. Perhaps the research done by Pearce and David (1987) was the ﬁrst attempt to empirically study the content of mission statements. They found the speciﬁcation of target customers and markets as the highest in terms of frequency, and the identiﬁcation of the ﬁrm’s desired public image as the lowest frequency. Baetz and Bart (1996) in their study of mission statements in 135 Canadian ﬁrms developed a number of categories for analysing the statements using the Ground Theory approach. Concerning the content of the analysed mission statements, they indicated that, the typical mission statement contained: essentially only one ﬁnancial objectives (e.g. to enhance proﬁtability and long-term value), or none at all; one or two non-ﬁnancial objectives (e.g. to provide a challenging work environment); one value/belief/philosophy statements (e.g. to be a responsible company); the organisation’s deﬁnition of success (e.g. meet or exceed customer’s expectations); the organisation’s number one priority; a deﬁnition of the organisation’s strategy (i.e. a deﬁnition of speciﬁc products, speciﬁc markets and two bases for competing) and reference to one stakeholder (typically the customer) (p. 528).

Accordingly, O’Gorman and Doran (1999) in their recent study found that, the mission statement in SMEs put more emphasis on concern for survival, product or services, and their customers. Their ﬁnding is similar to the ﬁndings of Pearce and David (1987); O’Gorman and Doran (1999) also found that, the least important

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Table 6.2

167

Components of mission statements identiﬁed by empirical researches

Researcher(s) Pearce and David (1987)

Klemm et al (1991)

Relevant Country USA

UK

Identiﬁed components • • • • • • • • • • •

The speciﬁcation of target customers and markets Principal products and /or services The geographic domain Core technologies used Growth, survival and proﬁtability Company philosophy Long term purpose of the organization reﬂecting deeply held corporate views Long term strategic objectives outlining desired direction and performance in broad term Objectives in the form of quantiﬁed planning targets over a speciﬁc period Scope and activities of the company in terms of industry and geographical spread

Baetz and Bart (1996)

Canada

• • • • • •

Financial objectives Nun-ﬁnancial objectives Firm’s value, belief, and philosophy Organization’s deﬁnition of success Deﬁnition of organization’s strategy Customers

O’Gorman and Doran (1999)

Ireland

Concern for survival Product and or services Concern for customers Geographic domain Company philosophy Concern for quality Self-concept Public image

Karami and Analoui, 2003

UK

• • • • • • • • • • • • •

Proﬁtability Customer satisfaction Product/service quality Public image

components of mission statements in SMEs are customer/market, concern for suppliers and core technology. In comparison with the previous researches, in this research it has been decided to identify the components of the ﬁrms’ mission statement based on the CEOs’ priority. This method is very similar to the research methods used by previous researchers (for example Rarick and Vitton, 1995; O’Gorman and Doran, 1999; Bart, 2000). Thus, the respondents were asked to list the components of the mission statements of their

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ﬁrms. An analysis of the data (see Chapter 4) shows that, the ﬁrms emphasized on ‘long term proﬁt, survival and growth’ as the ﬁrst priority in their mission statements (74 per cent). Similarly, the same result has been reported by Baetz and Bart (1996) for ‘ﬁnancial objectives’ (46 per cent); and O’Gorman and Doran (1999) for ‘concern for survival’ (72 per cent). The results of this research show that, the respondents have emphasized on ‘concern for supplier’ as their last priority (9 per cent). Based on the analysis of the data, generally, a typical mission statement in SME contained: long term proﬁt, survival and growth; customer satisfaction; core technology; market; company philosophy and values; product and services quality; public image; geographic domain; Self concept; and concern for suppliers. The ‘customer satisfaction’ component, which was the third most frequent (64 per cent) in O’Gorman and Doran’s (1999) study, was the second most frequent component (67 per cent) in this study. More especially, the ‘core technology’ component which was the fourth most frequent in the Pearce and David (1987) study in the USA, and not a part of O’Gorman and Doran’s (1999) study in Ireland, was the third most frequent in the current study. Perhaps the technology intensive nature of the electronic industry could be considered as an important factor in this case. On the other hand, the data analysis shows that, the three least important components of the mission statements were geographic domain, self-concept, and ﬁnally concern for suppliers. Mission Statements and Firm Performance It has been argued that, one of the reasons for the lack of consistent guidelines concerning the development of mission statements is that researchers have not attempted-or have not been able-to empirically link their recommendations to performance (Ireland and Hitt, 1992; Bart, 2000). Pearce and David (1987) were among the ﬁrst to demonstrate that a relationship existed between selected mission statement components and one measure of performance, that is to say, ‘high versus low’ performing Fortune 500 companies. Pearce and David found that: • •

higher performing ﬁrms have a comparatively more comprehensive mission statement; corporate philosophy, self-concept, and public image are especially important components to include in mission statements.

In addition they argue that, their ﬁndings provide a realistic portrayal of the components used in corporate mission statements. Two years later, David (1989) performed a content analysis on the mission statements of 75 Business Week 1000 ﬁrms and tried to ﬁnd a link between mission statements and ﬁrm performance. He measured the ﬁrm performance in terms of gross earnings, return on investment (ROI), and earnings per share (Eps). The results of the study showed that, there was no signiﬁcant relation between mission statement and ﬁrm performance. Similarly, Klemm, Sanderson and Luffman (1991) in their study of 59 top companies from the Times 1,000 that had mission statements found no signiﬁcant differences in performance (measured in terms of employee turnover and proﬁts). In contrast,

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there have been several successful attempts at linking mission statements to ﬁrm performance. For instance, Baetz and Bart (1996) found a signiﬁcant correlation between selected mission content items (that is ﬁnancial objectives, values, purpose business strategy and length) and such performance measures as return on sales, return on assets, percentage change in sales and percentage change in proﬁts. More recently, O’Gorman and Doran (1999) investigated the relationship between mission statement and ﬁrm performance in Irish SMEs. They reported that, ‘…high-growth SMEs do not have more comprehensive mission statements (ones that exhibit more of the eight components) than low-growth SMEs.… this study suggests that including “company philosophy”, “self-concept,” or “public image” in a mission statement does not improve a ﬁrm’s performance. Neither are “more comprehensive” or “high content” mission statements more likely to be correlated with high performance’ (O’Gorman and Doran, 1999, 64). In this study, the CEOs perceptions of importance of having formal mission statements on the ﬁrm performance were examined. The majority of respondents (n = 89, 67 per cent) considered a written and formal mission statement as an essential factor in increasing ﬁrm performance. While only 3 per cent of respondents (n = 4) believed that, having a mission statement is not important in developing ﬁrm strategies and achieving its objectives. In order to analyse the impact of mission statement on ﬁrm performance all of the ﬁrms that responded to our survey were ranked into two categories based on their performance namely, high performance and low performance. This method has already been used extensively in similar researches (for example Campbell, Devine and Young, 1990; Smith, 1998; O’Gorman and Doran, 1999). Consequently a percentage of the high-performer and low-performer ﬁrms, were compared for each of the 10 components of their mission and objectives (see, Table 6.3). It has been concluded that, high performance ﬁrms put more emphasis on long term proﬁt, survival and growth (91 per cent), customer satisfaction (82 per cent), core technology (76 per cent) and geographic domain (69 per cent). In comparison, low performance ﬁrms put more emphasis on long term proﬁt, survival and growth (83 per cent), core technology (73 per cent), and product and service quality (64 per cent). Both low and high performance ﬁrms have put less emphasis on concern for suppliers (High performance 17 per cent, and Low performance 12 per cent). The results of this study support the ﬁndings of O’Gorman and Doran’s (1999) work indicating that, high performance ﬁrms do not have more comprehensive mission statements than low performance ﬁrms. In comparison with the previous researches in this research it has been found that, respondents emphasized on one additional component in the ﬁrm’s mission statements namely, core technology. Perhaps, because of the dynamic nature of the electronic industry, the ﬁrms have targeted developing technology. Apart from comparison analysis, an attempt has been made to study the association between having a mission statement and the research variables. Using the t-test results it has been found that, there is a signiﬁcant association (tstatistics = 28.342, p-value < 0.00) between having a formal mission statement and ﬁrm performance in the studied ﬁrms. This result conﬁrms the signiﬁcant (γ = 0.69, p < 0.01) correlation between ﬁrm performance and developing a mission statement (see Chapter 4). In other words, successful SMEs, tend to have formal mission

170

Table 6.3

Strategy Formulation in Entrepreneurial Firms

A comparison of mission statements in high and low performance SMEs Components

Total ﬁrms†

High Low performance performance ﬁrms†† ﬁrms††† Long term proﬁt, survival and growth 74 91 83 Customer satisfaction 67 82 61 Core technology 63 76 73 Product and services quality 52 51 64 Company philosophy and values 48 42 46 Market 47 39 34 Public image 32 28 22 Geographic domain 21 69 52 Self concept 17 47 33 Concern for suppliers 9 17 12 † The percentage of the total of the ﬁrms, which included component in their mission statements. †† The percentage of the high performance ﬁrms, which included component in their mission statements. ††† The percentage of the low performance ﬁrms, which included component in their mission statements.

statements. As noted already, one of the most notable ﬁndings of this research is the difference between professionally run SMEs and family run SMEs in terms of developing formal mission statements. The analysis of the data, reveals that, professionally run SMEs are more inclined to have formal and written mission statements, and long run business plans than do family ﬁrms (t-statistics = 34.561, p-value < 0.00). In contrast, family run small businesses are more inclined to have an informal mission statement. It also has been found that, when increasing in size, the studied ﬁrms then insisted on developing a formal mission statement (t-statistics = 23.512, p-value < 0.01). These ﬁndings are very close to the ﬁndings of Smith (1998) and O’Gorman and Doran (1999). Industry and Environment Analysis in SMEs The discussion in this section covers the ﬁndings on the existence and nature of environmental analysis when developing business strategies in small and mediumsized enterprises. Environmental scanning is considered to be the ﬁrst element of the strategic management process in the organizations. Businesses use information to develop strategies that address opportunities and threats, and allow them to gain or maintain a competitive edge. Previous researches have shown that more and more large multinational corporations have adopted a formal process for collecting and analysing information on the external environment (Inkpen, 2000; Ma, 2000; McEvily and McCabe, 2000). However, there is a big debate about gathering and

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analysing the information from the external environment by SMEs. For instance, research into the personality characteristics of entrepreneurs has found that many have the attitude that the owner or manager knows the market in which the business competes and does not need information gathered in a more systematic approach (McKenna, 1996). However, it may be equally important for small businesses to have the capabilities to assess the external business environment properly. Therefore, the question which has been raised in the conceptual framework of the research, is related to the importance of environmental analysis as a basic part of the strategic management process in small businesses. In this section, the ﬁndings of the data analysis on the importance and impact of environmental scanning on research variables such as ﬁrm size and ﬁrm performance are discussed. As discussed in Chapter 2, an organization’s overall business strategy is related to the sophistication, scope and intensity of its environmental scanning (Choo, 1999). An organization that follows a particular strategy, such as product differentiation, cost leadership or focus strategy, or adopts a certain strategic stance, such as prospector, analyser or Defender, is likely to operate a scanning mode that provides the required information and information processing capabilities to pursue its desired strategy. Now the question has been raised, whether or not SMEs can beneﬁt from establishing a formal scanning system. The results of the data analysis show that, signiﬁcant correlations exist between an increased emphasis on environmental analysis and effective strategy formulation in the studied ﬁrms. Further analysis (see Table 6.4) conﬁrms that, a scanning system is necessary for the formulation and planning of business strategies (t (129) = 31.226; P < 0.01); increasing proﬁt (t (130) = 28.152; P < 0.05); and growth rate (t (124) = 26.251; P < 0.01) of the ﬁrm, and developing the ﬁrm’s adaptability to unexpected environmental changes in a turbulent marketplace (t (128) = 21.821, P < 0.01). It also has been found that, practitioners and SMEs’ senior managers (strategists) perceive environmental scanning as an important dynamic (t (127) = 29.852, P < 0.05) system, which should be particularly sustained and controlled within the ﬁrms. It was discovered that, planning and implementing environmental scanning is a strategic activity in SMEs. Thus, in order to apply a strategic management system in the ﬁrm and beneﬁt from it, it is particularly important to consider the environmental scanning activity as a base for strategic management. Supporting the ﬁndings of the statistical analysis of the data, through analysis of the results of the interviews, it has been found that, environmental analysis is considered to be a strategic activity in the studied ﬁrms. It was learnt that, managing directors believe that their awareness of the environment plays a signiﬁcant role in the strategy formulation process. For instance, one of the managing directors of a medium-sized enterprise indicated that: .…It is a golden opportunity to take the blinkers off and to look at external factors in the business in order to assess the impact of these environmental factors on your business in particular and to view your ﬁrm as part of an interconnected business ecosystem.

Another manager has made a similar point:

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Table 6.4

Importance of environmental analysis, results of t-test*

Variable

d.f

tstatistics

P-value

129 130 124

31.226 28.152 26.251

0.001 0.048 0.002

128 131

21.821 23.282

0.003 0.002

130 130 128 131 127

25.002 24.103 31.453 38.257 29.852

0.017 0.082 0.013 0.022 0.040

Importance of establishing formal environmental scanning system in: Developing effective business strategies Increasing proﬁt Growth rate Firms adaptability with unexpected environmental changes Firm performance Managerial perception of importance of variables in environmental scanning: Personal sources Formal and external sources Quality of sources Manager’s background Dynamic environmental analysis

* is rejected for P < 0.05 (Scale: 1 = Not Important; 3 = Important; 5 = Extremely Important)

.…We worry about things nowadays that we never used to worry about before. Think about the technological changes in the industry. Now we worry about it. Environmental issues like technology are important external factors that inﬂuence ﬁrm strategy.

Regarding the source of information it has been found that, although managers scan with a wide range of sources, they prefer live information from personal sources (t (130) = 25.002, P < 0.05), rather than formal and external sources (t (130) = 24.103, P > 0.05) when seeking information about market-related environmental sectors. This ﬁnding is similar to the ﬁndings of Choo (1999). There is some evidence to indicate that source selection for scanning is inﬂuenced by the perceived quality of the source (t (128) = 31.453, P < 0.05). Generally speaking, it has been found that, managers in the studied ﬁrms perceive environmental analysis as an important factor in the formulation and implementation of business strategies. However, they intended to rely on informal rather than formal and systematic methods of gathering and analysing the information. Environmental Scanning and Firm Size Basically, organizations scan the environment in order to understand external forces of change so that they can develop effective responses that could secure or improve their market positions in the future (Orser, 2000; Wolff, 2000). As summarized in

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the literature review (Chapter 2) the extent of an organization’s ability to adapt to its Outside environment mainly depends on knowing and interpreting the external changes that are taking place (Berry, 1998). Considering the blind spots of the previous researches (Apfelthaler, 2000; Downs, 2000; Pelham, 2000), it has been assumed that there is a signiﬁcant relationship between ﬁrm size and establishing formal environmental analysis in developing business strategies within small and medium-sized enterprises. As discussed earlier, it has been found that, by increasing the size of the ﬁrms, in terms of the number of employees, there was more emphasis on formal environmental scanning systems. Supporting this result Spearman-rank order correlation analysis (see Table 6.5) shows that, a strong and signiﬁcant correlation (γ = 0.71, p < 0.01) exists between environmental analysis and ﬁrm size. Managers from medium, rather than small and micro ﬁrms, believe that the ﬁrm should analyse external factors before formulating business strategies. It was also discovered that, correlation between managers’ strategic awareness and ﬁrm size was positive and signiﬁcant (γ = 0.68, p < 0.01). These ﬁndings are very similar to the ﬁndings of Pelham (2000) and Apfelthaler (2000). Apart from correlation analysis, in order to examine the relationship between environmental analysis and ﬁrm size one-way analysis of variance technique has been employed. To investigate the relationships among ﬁrm size and having formal environmental analysis several measurement proxies were calculated. Firm size was represented by three categories (micro, small, and medium) that accounted for both annual turnover and number of employees (see Chapter 4). The hypotheses validated by using statistical analysis by ANOVA result (F(2,128) = 0.281; p < 0.05). As a result, by increasing ﬁrm size, emphasis on having formal environmental analysis in developing business strategies is increased. Managers of medium enterprises put more emphasis on environmental analysis than did the managers of small and micro enterprises. The ﬁndings of this research is supported by the ﬁndings of Smith (1998); Lundvall (2000), and Wolff (2000).

Table 6.5

The result of correlation analysis on environmental scanning

Variables

Mean

S.D.

γ-value

P-value

Managers’ strategic awareness

3.66

1.11

0.58

P < 0.01

Technological changes

3.84

1.03

0.32

P > 0.05

Strategies of competitors

3.76

1.07

0.01

P > 0.05

Economical trends

3.55

1.12

0.17

P > 0.05

Social and cultural trends

3.01

1.15

0.38

P > 0.05

Political and legal developments

2.82

1.15

0.23

P > 0.05

Firm size

2.27

0.56

0.71

P < 0.01

Performance

3.73

1.39

0.82

P < 0.01

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Priority of External Factors within the Industry Theoretically, through environmental analysis, the key economic, political, social, and technological trends can be correlated and identiﬁed with opportunities, strengths, and threats and weaknesses in order to determine the necessary strategies for the future development of the ﬁrm. Senior managers cannot build an effective strategic plan if they do not know where the ﬁrm has been or where it is likely to go. Generally speaking, this result has been conﬁrmed by ﬁndings regarding managerial perception of the impact of environmental factors changing on the ﬁrm’s strategy formulation and implementation (see Table 6.6).

Table 6.6

Impacts of environmental factors on developing strategy within studied ﬁrms, results of t-test*

Variable Economic trends Changes’ on competitors’ business strategies Technological changes Political and legal factors Social and cultural trends

d.f

t-statistics 128

27.531

Mean difference 3.21

130 127 129 131

32.539 39.762 27.328 54.423

3.32 4.27 2.12 1.98

P-value 0.020 0.017 0.001 0.182 0.095

* : Mean Importance Rating 3 : Mean Importance Rating < 3 (Scale: 1 = Not Important; 3 = Important; 5 = Extremely Important)

The results of the T-test analysis reveals that, technological environmental changes signiﬁcantly (t (127) = 39.762, P < 0.01) impacts upon strategy development within the studied ﬁrms. It also has been found that, economic trends (t (128) = 27.531, P < 0.05) and changes in competitors’ business strategies (t (130) = 32.539, P < 0.05) signiﬁcantly inﬂuence the developing strategy within the studied ﬁrms. In contrast, respondents did not consider political and legal factors (t (129) = 27.328, P > 0.05) or social and cultural trends (t (131) = 54.423, P > 0.05) as important factors, which could impact on strategy development within the studied ﬁrms. This ﬁnding suggests that, the strategists in the electrical and electronic industry, in their decision-making, should consider the technological changes more than other environmental factors. In this regard it has been assumed that, environmental factors such a technology signiﬁcantly impacts upon strategy development in small and medium-sized enterprises. The respondents were asked to indicate to what extent internal and external environment factors affect their ﬁrm’s strategy. The ﬁndings show that the respondents ranked the degree of impact of environmental factors on their ﬁrm’s decision-making process as follows. First priority: technological changes; second priority: competitors; third priority: economic trends; fourth priority: social and cultural trends; and ﬁnally ﬁfth priority: political and legal developments. In other words, 91 per cent of the respondents believed that, technological changes

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in the environment impacts on the strategy decision-making process within their organizations. In contrast, political and legal developments (45 per cent) seem to affect the strategic decision making process far less than the other factors. Subsequently, the impact of the strategies employed by their competitors; economic trends; and social and cultural trends were 83 per cent, 64 per cent, and 57 per cent respectively. Further analysis of the data show that the respondents indicated that factors such as ﬁnancial stability, ﬂexibility and adaptability with environmental changes in technology, increasing market share, and growth were classed as strengths within the industry. More importantly, they considered resource utilization, and especially efﬁcient human resources utilization, as another indicator of industry strengths. It is important to note that, the changes in the electrical and electronic industries market in terms of products and technology are very fast. So the ﬁndings of the research are suggesting that the ﬁrms, in order to improve their threats and weaknesses, and use the opportunities in the market, and increase their strengths, need to be ﬂexible in adapting to the technological changes in the market. They should also use their internal resources effectively. Environmental Scanning and Firm Performance in SME Sector As discussed in Chapter 2, a question has been raised in the debate that, whether or not environmental scanning impacts on ﬁrm performance (Bourgeois, 1980; Chaganti, Chaganti and Mahajan, 1989; Venkatraman and Prescott, 1990; Lang, Calatone and Gudmundson, 1997). Superior ﬁrm performance is a major objective of all the stakeholders of a ﬁrm. Strategists and strategic management scholars generally agree that both large and small ﬁrms that align their competitive strategies with the requirements of their environment outperform ﬁrms that do not (Chaganti, Chaganti and Mahajan, 1989; Venkatraman and Prescott, 1990). Based on the conceptual framework of the research it has been hypothesized that, there is a signiﬁcant relationship between ﬁrm performance and having environmental scanning in small businesses. In this study, we examined CEOs perceptions of the importance of having environmental scanning on the ﬁrm’s performance. It has been found that, the majority of respondents considered a scanning system as an essential factor in increasing the ﬁrm’s performance (n = 111, 83.37 per cent). As discussed in Chapter 4, through the correlation analysis, it discovered that there was a very strong and signiﬁcant relationship between a ﬁrm’s performance and having a scanning system (γ = 0.82, p < 0.01) in the studied ﬁrms. Regarding the frequency of environmental scanning, it has been found that, high performance ﬁrms seem to put more emphasis (Mean = 3.824, SD = 1.05) on a high frequency and coordinated scanning system. Successful SMEs stress the importance of environmental analysis in the development of corporate strategy. In comparison, low performance ﬁrms tend to place less emphasis (Mean = 2.472, SD = 0.71) on the need for a high frequency of environmental scanning. The result of ANOVA (F(1,128) = 0.328; p < 0.05) conﬁrms that, this difference is signiﬁcant (see Table 6.7). In other words, there is a signiﬁcant

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difference between high performance and low performance ﬁrms in terms of the frequency of environmental scanning.

Table 6.7

ANOVA results on environmental scanning and ﬁrm performance

Factors

Low Performance High Performance F-value Firms Firms Mean S.D. Mean S.D. 2.126 0.81 4.273 1.32 0.427

Having Formal Scanning System Scanning Frequency Informal and personal resources Formal and external resources

P-Value

P < 0.05

2.472 3.371

0.71 1.17

3.874 3.462

1.05 1.29

0.328 0.081

P < 0.05 P > 0.05

2.957

0.98

3.683

1.27

0.219

P > 0.05

One reason for this is managers’ involvement in daily operations. CEOs of small and medium-sized enterprises, constrained by their involvement in their ﬁrms’ daily operations, may not have time for frequent scanning of their external environments. Consequently, environmental scanning may be relatively infrequent. Relatively infrequent scanning should be reﬂected in low mean values in the frequency-ofscanning indexes. Generally, having an environmental scanning system signiﬁcantly impacts upon the ﬁrm performance F(1,129) = 0.427, P < 0.05. As discussed already, in comparison with high performance ﬁrms (Mean = 4.273, SD = 1.32), low performance ﬁrms put less emphasis (Mean = 2.126, SD = 0.81) on having environmental scanning. The impact of this difference could be seen in ﬁrm performance. Not surprisingly, environmental scanning in high performance ﬁrms becomes increasingly sophisticated and forms a formal and explicit activity within the studied ﬁrms. Thus, scanning of the environmental sectors that arguably have the most impact on ﬁrm performance and the formulation and implementation of competitive strategy occurs relatively infrequently in low performance SMEs. Strategic Planning: Formal or Informal? There is a growing body of literature examining the effects of formal strategic planning in the small ﬁrms (Robinson, Pearce and , 1984; Shrader et al., 1989). There are also numerous ﬁeld studies examining the effects of various forms of strategic and operational planning activities on a variety of ﬁnancial performance measures for both large and small ﬁrms (Robinson, Pearce and , 1984; Schwenk and Shrader, 1993). Researchers who have undertaken these studies, especially those of small ﬁrms, have drawn conﬂicting conclusions: some claim that formal strategic planning provides structure for decision making, helping small business managers take a long-term view, and, in general, beneﬁts small ﬁrms; others conclude that formal strategic planning has no potential pay off for small ﬁrms because it is a

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heady, high-level, conceptual activity suited solely to large ﬁrms and therefore has no effect on the ﬁnancial performance of small ﬁrms. It has been discussed that, in the world of the small business, strategy may be much less formal in its nature (Chan and Foster, 2001). At the extreme the small owner-managed business may have an implicit rather than an explicitly stated strategy (US, see, for example Robinson, Pearce and , 1984; Aram and Cowen, 1990, or Europe, see, for example Bridge and Peel, 1999). In this research an attempt has been made to discover the form of the strategic planning techniques formal or informal, employed in the studied ﬁrms. Data analysis (see Chapter 4) shows that a number of signiﬁcant correlations exist between employing formal strategy and business life cycle, competition and ﬁrm size in the studied ﬁrms. In connection with employing formal strategic management in the studied ﬁrms, the ﬁrst variable, which has been analysed, is business life cycle. Academics and practitioners generally agree that the ﬁrms’ life cycle concept is a crucial factor in the successful management of a ﬁrm’s strategic management effort (Kotler, 1997). By identifying the stage that the ﬁrm is in, or may be headed toward, companies can formulate better business plans and more effective strategies and tactics. For instance it has been discussed that, the stage of the product life cycle has a deﬁnite impact on the decision to choose technology and R&D strategies (Roy and Dugal, 1999). The studied ﬁrms in the growth stages of their life cycle, were found to have signiﬁcant differences in developing business plans. Table 6.8 illustrates the results of T-test of comparing means of formal strategic planning and the other variables. It has been found that (t (128) = 24.354P < 0.01) the strategic management process within SMEs becomes increasingly formal and explicit over the life cycle of the ﬁrm. More strategic management techniques which result in a written strategic plan and involve formal strategic review sessions on a six monthly or annual basis are likely to be apparent in SMEs which have grown successfully through the early stages of their life cycle. Table 6.8

Formal strategic planning in SMEs, results of t-test*

Variable Firm’s turnover Number of employees Firm size Firms’ established date (age) Stage of the ﬁrms (life-cycle) Competition Environmental turbulence Manager’s educational background Export activities

d.f

t-statistics

P-value

128 130 129 130 128 131 127 130 130

34.452 35.269 28.342 45.231 24.354 28.247 36.253 25.348 45.571

P<0.05 P<0.01 P<0.01 P<0.05 P<0.01 P<0.01 P<0.05 P<0.05 P<0.01

* is rejected for P < 0.05 (Scale: 1 = Not Important; 3 = Important; 5 = Extremely Important)

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During the ﬁrm’s infancy, the purpose of planning is likely to be that of securing external control. In later life cycle stages, however, the business plan will be developed where the CEOs perceive beneﬁts will arise for the ﬁrm in terms of internal control. Apart from business life cycle, a number of signiﬁcant relationships have been found between ﬁrm growth indicators such as ﬁrm’s turnover (t (128) = 34.452 P < 0.05), number of employees (t (130) = 35.269 P < 0.01), ﬁrm size (t (129) = 28.342 P < 0.01), and importance of formal strategic planning in the studied ﬁrms. Generally speaking, as the size of ﬁrms grows, the CEOs’ perception of the importance of strategic planning to the future success of the business increases. The ﬁndings support the theses (Aram and Cowen, 1990; Berry, 1998) that, during the early stages of the ﬁrm’s life strategic management activities such as developing written business plans, and long term objectives, are unnecessary in terms of enhancing ﬁrm performance. More details of the relationships between ﬁrm size and strategy will be discussed in the next section. The last ﬁnding regarding the formal or informal strategic planning is that, as SMEs extend operations into globalization, they tend to undertake more strategic management activities. For instance it has been found that there is a signiﬁcant relationship between formal strategic planning and competition (t(131) = 28.247 P < 0.01), increasing complexity (t(127) = 36.253 P < 0.05), and export activities (t(130) = 45.571 P < 0.01). Therefore, it can be conclude that, the ﬁrms which are engaged in a high level of competition and export activities tend to undertake more formal strategic management activities. This ﬁnding supports the ﬁndings of Cavusgil (1982); da Rocha, Carl and da Cunha (1990), Dicthl, Koglmayr and Muller (1990) regarding SMEs involvement in an export context. Does the Size of the Firm Matter? An important question that, by and large, has remained under discussion is whether the size of the ﬁrm inﬂuences whether or not they employ strategic management activities. As it has been reviewed in the literature there are pros and cons to this issue. For instance, Ghobadian and O’Regan (2000) in their recent research, empirically examined the relationship between the size of small and medium sized manufacturing organizations (SMEs with up to 250 employees) and their culture, leadership and strategic planning. They concluded that, size does not have a signiﬁcant inﬂuence on leadership, organizational culture or the strategic planning processes. In contrast, some of the writers believe that there is a signiﬁcant association between ﬁrm size and employing strategic planning (Berry, 1998; Smith, 1998; Gartner and Bhat, 2000; Analoui and Karami, 2003). For instance, Berry (1998) concluded that, strategic planning is important to SMEs long term growth and development. Urata and Kawai (2000) reported that, SMEs regard well-developed plans, infrastructure, and industrial agglomeration, as important elements. As statistically discussed in the previous sections, the size of the ﬁrm was signiﬁcantly correlated to environmental scanning The result of analysis shows that, medium sized enterprises were more involved in environmental scanning than small or micro ﬁrms. It also has been found that, there was a signiﬁcant association between ﬁrm size and planning level in the studied ﬁrms. The ﬁrms with less than 10 employees were not engaged in any planning activities. This group of ﬁrms has been categorized as

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non-planners. In the second level, the ﬁrms with between 10 and 100 employees, engaged in ﬁnancial planning, while, the ﬁrms with between 100 and 200 employees, were engaged in formal ﬁnancial and informal strategic planning. Finally, ﬁrms that had between 200 and 250 employees were involved in strategic planning. Therefore, it can be conclude that, as the size of the ﬁrm grows, their involvement in planning increases. The other variable in connection with ﬁrm size that has been analysed is developing mission and objectives. It has been found that, there is a signiﬁcant association between ﬁrm size and having a formal and written mission statement and objectives. For instance, the ﬁrms with less than 10 employees have not had any mission statement or long-term objectives. In contrast, the ﬁrms with 200 up to 250 employees have emphasized on written mission statement and long-term objectives in relation to the ﬁrm’s products or market. Accordingly, the association between ﬁrm size and formal strategic planning was signiﬁcant. Regarding the ﬁrm performance, the result of this research conﬁrms a weak association between ﬁrm performance and ﬁrm size. In other words, there is no signiﬁcant difference between the studied ﬁrms in terms of their size. Since a signiﬁcant statistical relationship was noted between ﬁrm size and some strategic activities, therefore, analysis of ﬁrm size and business plan data indicated that larger ﬁrms were more likely to engage in strategic planning. It can be concluded that, as the size of the ﬁrm increases they undertake more formal strategic management processes. Strategy Development and Human Resources Involvement In the conceptual framework of the study, it has been hypothesized that, there is a positive association between CEOs perceptions of the importance of human resources and their involvement in the process of strategy formulation and implementation in the studied ﬁrms. The purpose of this section is to identify the nature and impact of human resource capabilities and their involvement in formulation and implementation of business strategies on the ﬁrm’s performance. In this regard, as discussed in the literature, the resource-based approach of the ﬁrm has been used. Boxall (1996) argues that by deﬁning ﬁrms as unique bundles of resources, the resource-based perspective emphasized the inevitable imperfection of factor markets. The HR capability of the ﬁrm is a considerable resource that determines the competitive advantages of the ﬁrm. Wright et al. (1998) also deﬁne the skilled work force as the HR capabilities. Accordingly, Analoui (1999) deﬁnes managerial skills namely, task related, people-related and self-development analytical categories as HR capabilities of the ﬁrm. In the light of a resource-based view of the ﬁrm, it has been assumed that, HR capabilities including skilled human resources, innovative human resources, human resource effectiveness, HR commitment, and training competent HR are all factors that determine the competitive advantages of the ﬁrm. The hypothesized relationships have been tested among variables using non-parametric statistical techniques namely Spearman rank order correlation analysis and Kruskal-Wallis test (see Chapter 4). These analytical techniques allowed the researcher to identify

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the relative magnitudes of the relation between HR capabilities, HR involvement in strategy and ﬁrm performance. Supported by the results of previous works by Lahteenmaki, Storey and Vanhala (1998) it is stated that the hypothesis is mainly concerned with the answer to the question: do or do not CEOs perceive HR capabilities as factors for determining competitive advantage of the ﬁrm? And if they do, to what extent does this factor have impact on a company’s performance? The ﬁnding of the research shows that, the majority of respondents rated HR capabilities as a key resource (n = 94, 71.2 per cent as very important and essential) within the organization. Thus, conﬁrming the previous researches (Dyer and Reeves, 1995; Analoui and Karami, 2003), it has been found that, putting the ﬁrm’s resources, more especially its human resources, into best use could be related to the CEOs’ perception of the importance of HR as a key resource of the ﬁrm. Accordingly, it has been assumed that if CEOs perceive HR as key resources they will put more emphasis on increasing the HR capabilities. Consequently, increasing HR capabilities will lead to increased ﬁrm performance. To test this, the CEOs were asked to rate the effects of the HR capabilities on the ﬁrm’s performance. The results (see Chapter 4) conﬁrm that, the majority of CEOs believe that human resource capabilities namely, skilled work force (n = 91, 69 per cent); innovative human resource (n = 78, 59 per cent); effective human resources (n = 102, 78 per cent); HR commitment (n = 82, 62 per cent); and training competent employees (n = 108, 81 per cent) have a high impact on increasing the ﬁrm’s performance. In order to verify this result statistically and to see whether or not any relationship exists between the HR capabilities and a ﬁrm’s performance, the Kruskal-Wallis test was used (Non-parametric ANOVA). It was been found that there is a signiﬁcant relationship between the HR capabilities and the performance of the ﬁrms. Data analysis revealed the following results of Chi-square test on ﬁrm performance and each of the HR capability indicators, including skilled human resources (χ2 = 234.115: d.f. = 16: p < 0.01), innovative human resources (χ2 = 201.732: d.f. = 16: p < 0.05), effective human resources (χ2 = 119.272: d.f. = 18: p < 0.01), training competent HR (χ2 = 172.233: d.f. = 16: p < 0.01) and HR commitment (χ2 = 166.152: d.f. = 16: p < 0.01) (see Table 6.10). Therefore, supporting the ﬁndings of previous researches (Wright et al., 1998; Rangone, 1999) this result led the researcher to conclude that, increasing HR capabilities will impact on increasing ﬁrm performance. Additionally, this result shows that, human resources capabilities have been considered as key competitive advantages of the ﬁrm so as to enable the generation of organizational effectiveness, and the high performance of the ﬁrm. Thus, any investment in increasing human resource capabilities must be considered as a strategic and crucial factor, which in turn will increase the ﬁrm’s performance. It can be therefore concluded that, increasing HR competencies and capabilities will lead to a ﬁrm’s success in achieving its goals and objectives in a competitive landscape. This will take place when the CEOs of the ﬁrms perceive HR as a key resource of the ﬁrm and act accordingly. An increasing number of studies have attempted to assess the HR involvement in the process of formulating strategy (Golden and Ramanujam, 1985; Buller, 1988; Huselid, 1995; Martell and Carroll, 1995; Anderson, 1997; Wright et al., 1998). Indeed, numerous writers (for example, Bennett et al., 1998; Wright et al., 1998;

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Analoui, 1999) have called for an increase in the extent to which HR are involved in the strategic management of the ﬁrm, yet very little data exists to conﬁrm the effectiveness of it. Anderson (1997) has argued that HR specialists, in order to help management realize the full value from the HR function in support of business objectives, could use two fundamental and speciﬁc processes. The ﬁrst is linking people strategies to the company’s strategic management process. The second is developing an HR strategy to support the corporation strategies (Anderson, 1997). As Wright et al. (1998) argue, although many researchers (for example, Schuler, 1992; Truss and Gratton, 1994; Brockbank, 1997) have called for the increased involvement of HR in strategic management, very little research has been carried out to examine the consequences of such HR involvement in the process of developing and implementation of business strategies. For instance, Bennett et al. (1998) in their study, argue that there is a negative relationship between HR involvement and HR effectiveness. In contrast, Wright et al. (1998) in their recent study found a strong correlation between HR involvement and HR effectiveness. In other words, they pointed to the fact that ‘managers highly value the HR function when the HR executives are heavily involved in strategic decision making’ (Wright et al. (1998, 24). To examine this thesis in the UK small and medium-sized enterprises (SMEs), in this study the CEOs were asked to rate the level of HR involvement in strategy within their ﬁrms. The analysis of the data show that, human resources are more involved in strategy activities in high performance ﬁrms rather than in low performance ﬁrms (see Table 6.9).

Table 6.9

HR involvement in strategic activities within high and low performance ﬁrms

Factors

Low High Performance Performance Firms* Firms** Strategy formulation 42 94 Long range planning 39 82 Strategic Decision-making 28 78 Developing HR systems 44 91 * The percentage of the low performance ﬁrms which shows the level of HR involvement in strategy. ** The percentage of the high performance ﬁrms which shows the level of HR involvement in strategy.

For instance in the high performance ﬁrms human resources were highly involved in strategy formulation (94 per cent), long range planning (82 per cent), strategic decision-making (78 per cent), and developing HR systems (91 per cent). The result reveals that, the contribution of the human resources in the development and implementation of strategies is very much related to the ﬁrm’s CEOs’ perception of HR as an important factor in a ﬁrm’s performance. As shown in Table 6.10, using Kruskal-Wallis analysis of variance a signiﬁcant relationship was found between ﬁrm performance and HR involvement in strategy.

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Table 6.10

Results of Kruskal-Wallis test on HR capabilities, involvement in strategy, and ﬁrm performance

Measured Variables

χ2 Value

d.f

Signiﬁcant (2-sided)

234.115 201.732 119.272 172.233 166.152

16 16 18 16 16

P<0.01 P<0.05 P<0.01 P<0.01 P<0.01

171.912 227.830 246.121

17 16 16

P<0.01 P<0.01 P<0.01

Firm Performance V. a) HR Capabilities Skilled HR Innovative HR Effective HR Training Competent HR HR Commitment

b) HR Involvement in Strategy Long Range Planning Strategic Decision Making Developing HR systems

The result of the test between ﬁrm performance and HR involvement in LRP (χ2 = 171.912: d.f. = 17: p < 0.01), HR involvement strategic decision-making (χ2 = 227.830: d.f. = 16: p < 0.01), and developing HR systems (χ2 = 246.121: d.f. = 16: p < 0.01) were signiﬁcant. A positive and signiﬁcant relationship between HR involvement and ﬁrm performance in general (γ = 0.70: p < 0.01) has also been found. Generally speaking, supporting Astarachan and Kolenko (1994) and Wright et al. (1998) theses, the results indicate that, human resources are more involved in the formulation and implementation of the business strategy in those ﬁrms where, their CEOs’ perceive HR as a key source of competitive advantage. Human resources as a factor for creating knowledge, play an important role in increasing a ﬁrm’s performance and its competitiveness. In other words, there is a positive association between a CEOs perceptions of the importance of human resources, and their involvement in the process of strategy formulation and implementation. So human resources are more involved in the strategic activities including: long range planning, revising HR systems, and developing HR systems, in high performance ﬁrms than low performance ﬁrms. Therefore, in order to increase ﬁrm performance and beneﬁt from HR capabilities, it is recommended that practitioners and SMEs’ managers their involve human resources in the strategic management process. Strategic Characteristics and Performance of the Entrepreneurial Firms It has been discussed that, strategic management is the process of determining what the organization intends to accomplish and how the organization and its resources will be directed toward accomplishing these goals in the coming period of planning. Such a process involves fundamental choices about the mission and goals of the

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organization; SWOT analysis in order to determine the strengths, weaknesses, opportunities, and threats of the ﬁrm; formulation business strategies; and ﬁnally implementation and evaluation of the strategies. The strategists must decide whom they will serve and the kinds of programming, services, or products the ﬁrm will offer and in which market they will operate. So one of the interests of this research was to identify the characteristics of the successful ﬁrms, which employ a strategic management process. As discussed in previous sections, the studied ﬁrms were different in terms of their strategic characteristics. In order to study these characteristics, the studied ﬁrms were categorized into two groups namely, high performance and low performance ﬁrms. From the analysis of the data and through discussion of the ﬁndings of the research, a list of key strategic characteristics or attributes of high performance versus low performance ﬁrms are devised. Table 6.11 compares the environmental analysis (SWOT), goals, strategic planning and implementation, and some general characteristics of high performance ﬁrms with those of low performers. Successful entrepreneurial ﬁrms are more involved in internationalization than low performance ﬁrms are. Joint venture, Research & Development agreement, and licensing are the most frequent internationalization modes used by the ﬁrms studied. It also has been found that the managers perceived focused strategy as an appropriate business strategy for their ﬁrms. In terms of leadership, there were differences between high and low performance entrepreneurial ﬁrms. For instance it has been found that in high performance ﬁrms, both managers and employees are committed to the goals and objectives of the ﬁrm. Informal and quick communication systems are frequently used in high performance ﬁrms. However the data analysis revealed that low performance ﬁrms employ more formal and hierarchical types of communication systems. In terms of motivation, leaders in high performance ﬁrms use more intrinsic rather than extrinsic motivational factors. Recognition, achievement and developing employees’ personal goals are good examples for this. The level of trust between the management team and employees is high in high performance ﬁrms. Finally, the research illustrates that organizational effectiveness is higher in high performance ﬁrms than low performance ﬁrms. Summary and Conclusion In this chapter an attempt has been made to discuss the ﬁndings of the study and answer the research questions. In the ﬁrst section the CEOs’ perceptions of environment scanning in small and medium-sized enterprises have been explored. In the second section the ﬁndings of the study on the factors associated with effective strategy formulation and implementation process in the studied SMEs is discussed. By and large, it has been found that the CEOs of the SMEs consider environmental analysis to be a strategic activity in developing business strategies. Establishing an effective formal environmental analysis could affect the studied ﬁrms’ performance. Regarding the factors associated with effective strategy formulation in SMEs, it has been found that high performance ﬁrms use and put more emphasis on mission statement when developing their business strategies than do low performance ﬁrms.

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Table 6.11

Strategic characteristics of low and high performance ﬁrms

Variable

Characteristics High Low Performance Firms Performance Firms

SWOT analysis Awareness Frequency of industry analysis Reaction to customers’ comments

Very good High Fast & precisely

Poor Low Slow

Goal setting Mission Objectives Period of objectives

Written and formal Clearly deﬁned Medium or long term

Informal Personal Short term

High Formal Strategic planning Multi-disciplinary management team High

Not at all Informal Financial planning Top management

High

Low

High participate

Low participate

High Yes

Moderate Yes

High Quick High High High

Moderate Formal Moderate Variable Moderate

Strategic planning Employing strategic management techniques Business plan Planning level Managerial involvement in strategic decision making Emphasis on long term strategic plans Emphasis on ongoing evaluation in strategic planning HR involvement in developing business plans Business strategies Internationalization Focused business strategy

Leadership Commitment Communications Motivation Quality Organizational effectiveness

Low

Professionally run SMEs are more inclined to have formal and written mission statements, and long run business plans than family run ﬁrms. There are signiﬁcant correlations between ﬁrm size, business life cycle, export activities, ﬁrm performance and employing formal strategic management techniques in SMEs. As the ﬁrms extend operations into globalization, they tend to undertake more formal strategic management activities. There is a positive association between CEOs perceptions of

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Chapter 7

Final Lessons and Conclusion Introduction In this book the senior managers’ perception of strategic management in entrepreneurial small and medium-sized enterprises in the UK’s high tech sector has been examined. Chapter 1 introduced the objectives and scope of the study. This chapter provided an overview of the major works in the areas of strategy and management. It also provided a brief description of the key concepts of strategy and entrepreneurship. Chapter 2 reviewed the existing theories of strategy formulation in entrepreneurial small and medium-sized enterprises. The theories differ greatly in their scope and purpose, and inevitably both have been the subject of, at times, ﬁerce academic debate which is outlined in the chapter. Chapter 3 provided a conceptual framework of the research. Accordingly, this chapter describes how the research design was developed and in doing so draws together all of the proceeding chapters. The chapter began by outlining the research questions through the development of the framework and the resulting hypothesis about the process of strategic management in entrepreneurial small and mediumsized enterprises. Chapter 4 introduced the major ﬁndings of the research in connection with research propositions and hypotheses. The hypotheses offered by the conceptual framework of the research are compared with the ﬁndings of the study providing an interesting insight into the phases of the process of strategy formulation in entrepreneurial small and medium-sized enterprises. Chapter 5 discussed strategic entrepreneurship and the role of entrepreneurs in the strategy formulation process in SMEs. It started with a discussion about exploring and examining the entrepreneurs’ perception of the importance of the strategic management process in the studied ﬁrms. It also explored the role of senior managers in the strategic management processes within small and medium enterprises. Chapter 6 continued with a discussion on the ﬁndings of the research regarding the existence and nature of environmental analysis when developing business strategies in the studied ﬁrms. Furthermore, the chapter discussed the ﬁndings about the factors associated with the effective strategy formulation and implementation process in SMEs. Finally, current chapter is the concluding chapter and as such is primarily concerned with the signiﬁcance of the ﬁndings of the research. The chapter begins by revisiting the aims of the research and the research questions. The chapter then considers each of the research propositions and hypotheses. It will then continue by explaining ﬁnal the lessons; the theoretical and practical contribution of the research.

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In the ﬁnal section, the limitations of this study are assessed and suggestions for further research are proposed. Research Questions and Objectives of the Study As discussed in Chapter 3, this study sought to answer the following questions in an attempt to highlight important considerations for managers of entrepreneurial smalland medium-sized ﬁrms. 1. What are the senior managers’ perceptions and attitudes to the strategic management process including: environmental scanning, strategy formulation and implementation, and evaluation of strategy in small and medium-sized enterprises? 2. Which factors are associated with an effective strategy formulation and implementation process in small and medium-sized enterprises and what is their impact on ﬁrm performance? 3. What are the characteristics of a dynamic strategic management model in entrepreneurial SMEs as an extension to the basic strategic management model, to assist in the decision making stages of formulation, implementation, and evaluation of strategy? Summary of Major Findings This section summarizes the main conclusions of the research in connection with each of the propositions. Therefore, the relevant ﬁndings and conclusions of the all of the four propositions are listed as follows. Proposition A To explore and examine the CEOs’ perception of the importance of the strategic management process in SMEs. H.1. CEOs of successful SMEs perceive employing a strategic management process as an important factor in running the business. •

•

•

A signiﬁcant proportion of the studied SMEs regard strategic management as important. Successful SMEs in the electrical and electronic industry use a strategic management process. However during the early stages of the ﬁrm’s life cycle, the adopted strategic management approach is likely to be informal. The companies, which have established a strategic management approach, are more adaptable to environmental factors such as technological changes. They are also dealing conveniently with organizational problems and conﬂicts. The ﬁrms, which employ strategic management techniques, whether formal or informal, exhibit more enhanced levels of success in the formulation and implementation of business strategies than those ﬁrms which do not employ such procedures.

Final Lessons and Conclusion

•

•

191

The studied ﬁrms, in terms of employing different types of planning, can be categorized into four groups including: non-planners, ﬁnancial planners, formal ﬁnancial and informal strategic planners, and formal strategic planners. Finally, the CEOs of the studied ﬁrms perceived the strategic management approach as an important factor in increasing the quality of product or services, achieving organizational objectives, increasing ﬁrm proﬁtability and overall organizational effectiveness.

Proposition B To explore the role of senior managers in the strategic management processes within small and medium enterprises. H.2. There is a signiﬁcant relationship between senior managers’ age, work experience, educational background and strategy formulation in SMEs. •

• • •

• •

• •

•

Younger senior managers have a more complete awareness of the strategic orientation in the development of their companies strategies than older senior managers do. The ﬁrms run by young senior managers would be more inclined to pursue more risky strategies than ﬁrms with older managers would. Younger senior managers are more inclined to develop novel and innovative strategies than older managers. Senior managers with managerial work experience place more weight on formal strategy development than those senior managers who lack managerial work experience. Senior managers with managerial work experience place more emphasis on opportunities rather than threats. Companies whose senior managers have a management educational background are more inclined to develop strategic plans than those managers have not had such an educational background. Firms run by senior managers without a management educational background are unlikely to have longer term strategic plans. Companies whose senior managers have a management educational background are more inclined to develop formal strategic plans than those managers have not had such an educational background. Senior managers with a management educational background place more weight on opportunities and less weight on threats than those managers have not had such an educational background.

H.3. Strategic awareness of the senior managers in SMEs signiﬁcantly impacts upon ﬁrm performance. • • •

The environmental awareness of the managers in SMEs is signiﬁcantly important. There is a signiﬁcant association between the strategic awareness of the managers and establishing a strategic management system within the ﬁrm. The senior managers’ strategic awareness and their perception of the beneﬁts

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arising from establishing a strategic management system within the ﬁrm, signiﬁcantly impacts upon the success of the ﬁrm in the long term. Proposition C To examine the existence and nature of environmental analysis in developing business strategies in small and medium-sized enterprises. H.4. The CEOs of the SMEs consider environmental analysis as a strategic activity in developing business strategies. •

•

•

A scanning system is necessary for the formulation and planning of business strategies. Some signiﬁcant correlations exist between environmental analysis and increasing proﬁt, the growth rate of the ﬁrm and developing the ﬁrm’s adaptability to unexpected environmental changes in a turbulent marketplace. Successful SMEs do analyse environmental factors when formulating business strategies. They stress the importance of environmental analysis in the development of corporate strategy. Small and medium-sized enterprises, regardless of size and performance, must have the means to assess the external environment to maintain a competitive edge. Lacking this, strategies will be formulated and implemented without any concern for how the market will react. Although managers scan with a wide range of sources, they prefer live information from personal sources rather than formal and external sources when seeking information about market-related environmental sectors.

H.5. There is a signiﬁcant relationship between ﬁrm performance and having environmental scanning. •

•

•

The senior managers (strategists) of the successful SMEs’ perceive environmental scanning as an important dynamic system, which should be particularly sustained and controlled within the ﬁrms. Environmental scanning in high performance ﬁrms becomes increasingly sophisticated and forms a formal and explicit activity within the studied ﬁrms. There is a signiﬁcant difference between high performance and low performance ﬁrms in terms of frequency of environmental scanning. High performance ﬁrms seem to put more emphasis on a high frequency and coordinated scanning system. In comparison, low performance ﬁrms put less emphasis on formal and high frequency of environmental scanning.

Proposition D To explore and examine the factors associated with the effective strategy formulation and implementation process in SMEs. H.6. High performance ﬁrms use and put more emphasis on mission statement in developing their business strategies than do low performance ﬁrms.

Final Lessons and Conclusion

•

•

• •

193

There are different beneﬁts from having a mission statement for SMEs. A mission statement is necessary for developing and planning business strategies, increasing the proﬁt and growth rate of the ﬁrm, and promoting a sense of shared expectations between the entrepreneur and all employees. A typical mission statement in an SME contained: long term proﬁt, survival and growth; customer satisfaction; core technology; market; company philosophy and values; product and services quality; public image; geographic domain; Self concept; and concern for suppliers. However, particularly in the electronic industry, the ‘core technology’ component, which was not suggested in the literature, is considered as one of the top three components of mission statements. Professionally run SMEs are more inclined to have formal and written mission statements, and long run business plans than family ﬁrms. Firm performance is positively related to developing mission statements. The high performance ﬁrms have developed and use a formal and written mission statement in the formulation of their business strategies. But the blind adoption of strategic management models used in large ﬁrms, including the development of a mission statement, is perhaps inappropriate for SMEs. A mission statement for an SME which is taken and/or not adapted from a large ﬁrm, may or may not have impact on the ﬁrm’s (SME) performance.

H.7. There are signiﬁcant correlations between ﬁrm size, business life cycle, export activities, ﬁrm performance and employing formal strategic management techniques in SMEs. •

• • • •

•

•

The strategic management process within the studied ﬁrms becomes increasingly formal and explicit over the life cycle of the ﬁrms. The ﬁrms in their early stages of life cycle put more emphasis on employing more informal strategic management techniques. As the size of the ﬁrm grows, the CEOs’ perception of the importance of strategic planning for the future success of the ﬁrm increases. As the ﬁrms extend operations into globalization, they tend to undertake more formal strategic management activities. The ﬁrms, which are engaged in a high level of competition and export activities, tend to undertake more formal strategic management activities. There is a signiﬁcant relationship between ﬁrm size and having formal environmental analysis in the studied ﬁrms. As the size of the ﬁrms increased, the CEOs’ put more emphasis on formal environmental analysis when formulating business strategies. As the size of the ﬁrms (in terms of number of employees and the amount of annual turnover) increased, their involvement in strategic management activities such as developing mission statement and objectives, annual and long term goals, and employing formal strategic planning techniques, increased. There was a weak association between the size of the studied ﬁrms and ﬁrm performance.

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H8. There is a positive association between CEOs perceptions of the importance of human resources and their involvement in the process of strategy formulation and implementation. • • •

•

The ﬁrms’ performance is highly related to the HR capabilities. Increasing HR capabilities will lead to a ﬁrm’s success in achieving its goals and objectives in a competitive landscape. Any investment in increasing human resource capabilities must be considered as a crucial and strategic factor, which in turn will increase the ﬁrm’s performance. Human resources are more involved in the strategic activities including long range planning, revising HR systems, and developing HR systems, in high performance ﬁrms than in low performance ﬁrms. Therefore, in order to increase the ﬁrm’s performance and gain beneﬁt from its HR capabilities, it is recommended that practitioners and SMEs’ managers involve HR in the strategic management process.

Theoretical Contribution The individual ﬁndings associated with each of the research objectives have been discussed earlier in this chapter. The interpretation of these ﬁndings in relation to existing academic theories has been proposed in Chapters 5 and 6. Some of the ﬁndings yield support to the work of other scholars and researchers, some modify and further elaborate existing concepts proposed in the literature, while yet still others ﬁndings provide contradictory evidence to the limited empirical research available in the ﬁeld of strategic management in small and medium enterprises. In this research an attempt has been made to discuss the ﬁndings of the study and answer to the research questions. The discussion is divided into four separate but interrelated sections. In the ﬁrst section the CEO’s perception of the importance of strategic management in SMEs is explored. A signiﬁcant proportion of the studied SMEs regarded strategic management as important. The studied ﬁrms in terms of employing different types of planning can be categorized into four groups including: non-planners, ﬁnancial planners, formal ﬁnancial and informal strategic planners, and formal strategic planners. Successful SMEs in the electrical and electronic industry use a strategic management process. However, during the early stages of the ﬁrm’s life cycle, any adopted strategic management approach is likely to be informal. This informal approach, enables the SMEs to respond quickly to the market demand. The companies, which have established a strategic management approach, are more adaptable with the environmental factors such as technological changes. The ﬁrms which employ strategic management techniques, whether formal or informal, exhibit enhanced levels of success in the formulation and implementation of business strategies than those ﬁrms which do not employ such procedures. Employing strategic management processes in SMEs signiﬁcantly helps in solving organizational problems, and reducing organizational conﬂicts. It signiﬁcantly impacts on employees’ satisfaction

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195

and changing organizational culture. Finally, the CEOs of the studied ﬁrms perceived the strategic management approach as an important factor in increasing the quality of product or services, achieving organizational objectives, and increasing ﬁrm proﬁtability and overall organizational effectiveness. In the second section the role of senior managers in the strategic management processes within the studied ﬁrms is investigated. In connection with the relationship between senior managers’ personal characteristics such as age, work experiences and strategy formulation in SMEs, it can be concluded that, younger senior managers have no more complete of the strategic orientation in developing of the strategies of the company than older senior managers. The ﬁrms that are by young senior managers would be more inclined to pursue risky strategies than ﬁrms with older managers would. Younger senior managers are more inclined to develop novel and innovative strategies than older managers. It also has been found that, there is no signiﬁcant correlation between the age of the CEOs and ﬁrm performance. Senior managers with managerial work experiences place more weight on formal strategy development than those senior managers who lack managerial work experience. Also the correlation between senior managers’ work experiences and ﬁrm performance was signiﬁcant. Companies whose senior managers have management educational backgrounds are more inclined to develop formal strategic plans than those managers have not had such an educational background. Where the ﬁrms are run by senior managers without a management educational background, longer and formal strategic plans are unlikely to be initiated. Senior managers with management educational backgrounds place more weight on opportunities and less weight on threats than those managers who have not had such educational background in small businesses. It also has been found that, the ﬁrm performance was not inﬂuenced by the educational level of the CEOs. Finally, the senior managers’ strategic awareness and their perception of the beneﬁts arising from having a formal strategic management system within the ﬁrm signiﬁcantly impacts upon the success of the ﬁrm in the long term. In the third section the CEOs’ perceptions of environment scanning in small and medium-sized enterprises have been explored. It is concluded that, the CEOs of successful SMEs consider environmental analysis (formal or informal) as a strategic activity when developing business strategies. A scanning system is necessary for the formulation and planning of business strategies; increasing proﬁt and growth rate of the ﬁrm, and developing the ﬁrm’s adaptability to unexpected environmental changes in a turbulent marketplace. Although managers scan with a wide range of sources, they prefer live information from personal sources rather than formal and external sources when seeking information about market-related environmental sectors. As the size of the ﬁrms increase, the CEOs’ put more emphasis on formal environmental analysis in formulating business strategies. Successful SMEs do analyse environmental factors in formulating business strategies. They stress the importance of environmental analysis to the development of corporate strategy. Environmental scanning in high performance ﬁrms becomes increasingly sophisticated and forms a formal and explicit activity within the studied ﬁrms. High performance ﬁrms seem to put more emphasis on a high frequency and coordinated scanning system. In comparison, low

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performance ﬁrms put less emphasis on formal and high frequency environmental scanning. Finally in the fourth section the ﬁndings of the study, the factors associated with the effective strategy formulation and implementation process in the studied SMEs are discussed. The studied ﬁrms placed the most emphasis on annual goals, followed by long-term goals, the mission statement, and short-term action plans. Trend analysis and competitor analysis received the least emphasis by the respondents. The respondents considered standard operation procedures, ﬂexibility of the plans, and human resources as important factors in implementing business strategies. High performance ﬁrms use and put more emphasis on mission statement in developing their business strategies than do low performance ﬁrms. Professionally run SMEs are more inclined to have formal and written mission statements, and long run business plans than family run ﬁrms. The strategic management process within the studied ﬁrms becomes increasingly formal and explicit over the life cycle of the ﬁrms. The ﬁrms in their early stages of life cycle, put more emphasis on employing informal strategic management techniques. As the size of the ﬁrm grows, the CEOs’ perception of the importance of strategic planning to the future success of the ﬁrm increases. As the ﬁrms extend operations into globalization, they tend to undertake more formal strategic management activities. The ﬁrms, which are engaged in a high level of competition, and export activities, tend to undertake more formal strategic management activities. As the size of the ﬁrms (in terms of the number of employees and the amount of annual turnover) increase, their involvement in strategic management activities such as developing mission statement and objectives, annual and long term goals, and employing formal strategic planning techniques, increases. Increasing HR capabilities will lead to a ﬁrm’s success in achieving its goals and objectives in a competitive landscape. Any investment in increasing human resource capabilities must be considered as a crucial and strategic factor, which in turn will increase the ﬁrm’s performance. Generally speaking, successful SMEs emphasize on long term plans, objectives and ongoing evaluation in strategic planning. They employ a multi-disciplinary management team in the strategic decision-making process and increase employees’ motivation through their involvement in the strategic activities. The successful ﬁrms consider the high quality of products or services, ﬁnancial stability, growth, ﬂexibility and adaptability to the changes in the market, competition capacity, HR capabilities, and technology know-how as competitive advantages of the ﬁrm. Policy Implications In Chapters 1 and 3, the strategic signiﬁcance of the contribution of the small business sector to the economy for national governments, industries and individual companies alike, was discussed. It also has been discussed that SMEs play a signiﬁcant role in creating innovative technology as a source of competitive advantage within certain sectors of industries. Accordingly, it has been concluded that SMEs have a critically important role in ensuring the future economic prosperity of the UK and as such

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197

will remain a key focus of economic policy makers’ attention throughout the 2000s. Policy-makers are one of the primary beneﬁciaries of this research. They require a well founded knowledge of the strategy and small business in order to be able to formulate effective policies which will use public resources as economically as possible. The emphasis of the UK Government small ﬁrm initiatives concentrates upon the provision of ﬁnancial support to access new technologies. In spite of this support many small and medium-sized enterprises fail every year. Policy instruments therefore may fail to acknowledge adequately that management, as opposed to technical considerations, are equally important determinants of successful innovation. Therefore, in light of the ﬁndings of this research it could be concluded that government support initiatives targeted towards SMEs should place equal weight on alternative areas of management development rather than concentrating on technology. According to the ﬁndings of this research, management training and development as well as senior managers’ strategic awareness are crucial factors in the ﬁrms’ success. The government supports the diffusion of knowledge in relation to innovation and best management practice. It is concluded by many researchers that successful innovation requires the entrepreneur to match technology with market opportunities. In this research it has been suggested that management must develop a strategic orientation in the business as it grows through the implementation of an effective strategic management process. Therefore, the governmental agencies such as DTI can help the SME sector by putting more emphasis on management development as well as innovation and technology in policy-making. One emerging solution to that problem involves learning organizations. The recent utilization of learning organizations is a result of the failure of more traditional training programs to meet the needs of the small businesses. Learning organizations emphasize the importance of learning at the individual, team, and organizational levels, thereby increasing the likelihood of further developing a competent and competitive workforce. Therefore, it is concluded that UK Government departments such as DTI that deal with SMEs policy making, can employ such a strategy and put more emphasis on the management training and development in small businesses, as well as technology and innovation. Enterprise agencies, business link and the small business services and trade associations could also be considered as beneﬁciaries of this research. They too can beneﬁt from the ﬁndings of this research when dealing with management issues in the small business sector. Some Learning Points for SME Managers Generally speaking, in this research it has been found that in successful small and medium enterprises the management initiates a strategic orientation in the business. Furthermore, it has been concluded that the strategic awareness of the senior managers signiﬁcantly impacts on management style; formulation and implementation of business strategies in the small business sector. Accordingly, it has been concluded that employing a strategic orientation and adopting strategic management tools impacts on the ﬁrm performance. In this research the characteristics of the high performance

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Strategy Formulation in Entrepreneurial Firms

and low performance small and medium-sized enterprises have been provided. In light of the results of this research in determining the strategic characteristics of the SMEs, a set of prescriptions which may be useful not only to practitioners but also to academic analysts of strategy in SMEs are provided. Based on the theoretical models employed earlier in this thesis, it is hoped that the prescribed strategies could be of some help to other ﬁrms in achieving their objectives. The CEOs of the SMEs should develop an awareness of the industry and competitors, and consequently scan the environment and collect information about rivals on a regular basis. They should be aware of the ﬁrm’s strengths and weaknesses and be ready to exploit the ﬁrm’s strengths and improve weaknesses. Being aware of the ﬁrm’s opportunities and threats is a crucial factor in the formulation of the business strategies. Managers in SMEs should be aware of new products and keep up-to-date with changes in the market. Frequently analysing the industry in which the SMEs operate and the competitors’ business strategies, as well as reacting to the customers’ comments fast and precisely, will positively impact on the ﬁrm performance. The result of this study reveals that successful SMEs develop a clear mission statement and ensure that it is clear to all employees. They develop quantiﬁable ﬁnancial goals, and set long term and clear objectives and targets, and then work towards them. Successful SMEs aim for long-term proﬁt and growth. They set business rather than personal goals. Regarding strategy formulation and implementation the research ﬁndings conﬁrm that successful SMEs develop formal business plans and employ a multi-disciplinary management team in strategic decision-making process. Successful CEOs are ﬂexible and adaptable in developing the ﬁrm’s business plans and learn from their and others experiences in strategic decision-making. Being self-critical and carrying out an ongoing evaluation of the ﬁrm’s strategic planning, commitment to those strategic plans and then following them through, are again important factors in driving the SMEs forward. It has been suggested that CEOs should take into account employees’ suggestions to increase their motivation and also to involve their employees when developing business plans. Successful SMEs implement and update new technology, and learn how to use it correctly. They use IT for the planning and implementation of the business strategies as well as budgeting and ﬁnancial management of the business. Successful SMEs provide high quality products or services for long-term customer satisfaction. They keep communication efﬁcient and speedy rather than formal and slow. Finally, in order to increase effectiveness, CEOs should develop effective teamwork in the organization. Limitations of the Study Generally speaking, the research suffers from two limitations. The main limitation of the research is the focus of the study. The focus of this research is upon SMEs in the electrical and electronic industry in the UK. Therefore, it may be recognized that the ﬁndings of this study may not be generalized to the wider population of small and medium-sized enterprises in the UK. However, throughout the empirical research, care was taken to ensure that the ﬁndings reported were statistically robust. In

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particular, a sub-sample of 12 companies was chosen for interview purposes to ensure that conﬁdence could be placed in the validity and generalization of the research ﬁndings. The second limitation of the study is a methodological limitation. As discussed previously, each research methodology has its own advantages and disadvantages. In Chapter 3 the advantages and disadvantages of alternative research techniques were highlighted and the researcher sought to counterbalance the inherent weaknesses of any speciﬁc procedure by combining methodological approaches. Such methodological triangulation was judged to enhance the validity, reliability and generalization of research ﬁndings. In spite of this, some limitations of the research methodology are noted. As both qualitative and quantitative data were gathered by means of survey techniques, the research suffers from the possibility of non-response bias, however much effort was made to reduce the possibility of non-response bias. During the primary data collection process, the researcher was dependent upon the vagaries of interpretation, self-observation and the eagerness of the respondents to please. In other words, the data generated may be subjective and impressionistic. While very effort was made to ensure the validity and reliability of the data through meticulous research design, it is unrealistic to assume that all of these problems can be avoided. Suggestions for Further Research Considering the research ﬁndings and limitations of the study, some of the further research possibilities are suggested below. First, as it has been mentioned in the research limitations, this research focused on the electronic industry in the SME sector. In order to eliminate this limitation, a replication of this research encompassing a sample from a wider industrial base within the small business sector, would be valuable. This could be carried out to explore further the notion of how strategists formulate and implement the ﬁrms’ business strategies. Second, this research focused on exploring the CEOs’ perception of the strategic management process in SMEs. It investigated the strategic characteristics of the successful SMEs. A number of further researches could be carried out to study the formulation of functional strategies in the SME sector. For instance, an investigation into the employed marketing, HR and technology strategies by successful SMEs would yield interesting results. Third, this research opened the discussion of internationalization and globalization in the SME sector. Further research could be carried out to investigate the nature and methods of internationalization and globalization strategy in small and mediumsized enterprises. Fourth, this research focused only upon the SME sector in the UK, yet the contribution and importance of the small business sector to economic prosperity is recognized by the governments around the world. A number of comparative studies based in several countries such as European countries, USA and Japan, would yield interesting results. Such studies would help to provide management practices in international markets.

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Index

Aaker 55 Ackoff 45 Ackroyd 94 Adam 53 age 106, 139 Ahls 137 Amboise 20, 78 Analoui 1, 8, 16, 43, 45, 57, 130, 146, 178, 180 Anderson 133, 138, 180, 181 Andrews 1, 3, 10, 31, 69 annual turnover 104 ANOVA 96, 140 Ansoff 1, 7, 12, 13, 16, 31, 32, 11, 10, 69, 133 anti-positivism 69 Apfelthaler 2, 173 Aram 177, 178 Armstrong 76, 133 Arthur 35 Astarachan 138, 182 Austin 17 awareness 15, 81 Baetz 113, 114, 166, 168, 169 Bagchi-Sen 48 Bain 10 Baird 46 Bamberger 47, 48 Bantel 139, 143 Barney 146 Barry 138 Bart 45, 113, 114, 166, 167, 168, 169 Beal 1, 2, 20, 43, 76, 80, 77, 125, 136 Beer 58 Bell 90 Bennett 58, 180, 181 Berger 35 Bergeron 43 Berry 1, 2, 20, 32, 44, 56, 76, 79, 80, 132, 133, 138, 140, 173, 178 Best 57 Bhat 178 Bhide 32

Binks 19 Birkinshaw 17 Birley 139, 143 Blackburn 67, 70, 75, 86, 88 Bourgeois 31, 175 Boussouara 35 Bouwen 35 Bowman 1, 3, 13, 14, 44, 45, 46, 58, 159, 160 Boxall 10, 11, 31, 58, 158, 46, 179 Boyd 35, 36 Bracker 2, 21, 76 Bridge 1, 80, 133, 177 Brockbank 181 Brodwin 31 Brown 133 Bruce 2, 32, 79, 132 Bruno 32 Bryman 70, 71, 73, 83 Bryson 21 Buller 180 Burn 51, 52, 67, 73, 95, 96, 129, 130, 131, 144 Burrell 68, 69 business level strategy 163 model 163 owner entrepreneur 130, 131, 138 plan 110, 136 planning involvement 111 strategy 46, 52, 157, 192 Buzzell 124 Bygrave 18 Calatone 43, 175 Caldwell 53 Cameron 18 Campbell 44, 45, 159, 169 capabilities 146, 160, 161 Cardinal 76 Carl 142, 178 Carroll 180 Carson 32 Casellan 95, 96

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Strategy Formulation in Entrepreneurial Firms

Cavusgil 141, 178 CEOs 81, 106, 134, 190 Cespedes 55 Chaffee 5, 32 Chaganti 175 Chaharbaghi 75 Chan 2, 20, 125, 129, 133, 138, 141, 142, 143, 145, 147, 177 Chandler 3, 31, 47, 69, 146, 162 Chaston 35 Chen 11, 70 Child 139 Chisnall 73 Choo 41, 42, 43, 171, 172 Churchill 95 Clark 43 Cohen 85, 91 Cole 1, 12 Collin 1, 14, 18 Collis 44, 46, 50, 51, 159, 160, 161, 162, 163 company details 103 competitive advantage 163 forces 161 strategy 49, 50, 161 continuous level 92 Cool 10 Copacino 136, 138 core competencies 160 technology 168 corporate characteristics 83 strategy 11, 50, 157, 158 cost leadership 164 costing programmes 121 Covin 33 Cowen 177, 178 Cragg 20 Cramer, A. 83 Cramer, D. 95, 96 creativity 144 Cromie 32 Cunha 178 Cunningham 32 Curran 19, 67, 70, 75, 86, 88,132, 133, 138 da Cunha 142 Da Rocha 142, 178 Daft 2, 8, 9

Dalton 76, 80 data analysis 94 collection 84 techniques 88 plan 96 Datta 47 David 1, 12, 36, 45, 113, 166, 168 De Soto 54 Deakins 35 Dean 17 decision making process 115 deductive 70 DeGenaro 2 demographic proﬁle 104, 105 design lens 136 developing business plan 123 Devine 45, 169 Devins 19 Dichtl 141, 178 differentiation 164 Dipboye 85 diversiﬁcation 46 Dixon 124 Dollinger 18 Donaldson 69 Dool 86 Doran 20, 114, 125, 166, 167, 168, 169 Douglas 69 Downs 173 Drazin 56 Dugal 136, 177 Duncan 137 Dyer 180 dynamic capabilities theory 146, 147 SME strategic management model 80 Dyson 80 education 107, 143 effective strategy formulation 165 implementation 165 electronic commerce (EC) 52, 53 electronic industry 93 emergent strategy 4 employees 120 employees’ satisfaction 123 Engler 54, 55 Ennew 19 entrepreneur 77, 129

Index entrepreneurial ﬁrms 149, 150, 182 management process 18 SMES 18, 31, 39, 82, 132 thinking 21 entrepreneurship 17 approaches 17 environmental analysis 119, 136, 170, 171, 172, 192 environmental scanning 40, 41, 43, 80, 119, 123, 172, 173, 175 epistemology 68 European commission 79 evaluation 80, 84 experience lens 136 external environment 83 factors 115, 114, 174 Fahey 41 Falsey 45 Faulkner 14, 159, 160 Feltenstein 76 Feurer 75 ﬁnancial planning 134 ﬁrm performance 124, 137, 168, 175, 191, 192 measurement 124 ﬁrm size 119, 147, 172, 178, 193 ﬁve force model 116, 162 Fleck 20, 56 ﬂexibility of business plans 121 Flood 31 Flores 137 Floyed 55 focus strategy 164 formal strategic planning 111, 134 Foster 2, 20, 38, 80, 125, 129, 133, 141, 142, 143, 145, 147, 177 Freeman 8, 76 Fulmer 58 functional strategy 157 Gable 1 Gale 124 Garnier 143, 178 gender 107 generic business strategies 163, 164 competitive strategy 51 Ghobadian 178

Ghoshal 4, 8 Giddens 68 Gilbert 8, 85, 86 Gimeno 19, 20, 70 Giona 43 goals 160 Golden 180 Goldsmith 10, 11, 12, 56 Gomez-Mejia 140 Goodwin 2, 133, 138, 139 Gorton 86 Govindarajan 57 Grant 11, 31 Gratton 181 Gray 18 Green 80 Greenwald and Associates 133 Grundy 55 Gudmundson 43, 175 Gupta 56, 57, 78, 79 Hagedoorn 147 Hakim 19 Hambrick 1, 83, 139, 143 Hamel 32, 34 Handler 133, 138 Hanlon 32, 35 Harada 18 Harrison 51, 52 Hart 71 Hatten 70 Hauc 55, 56 Hayne 42 Heck 133 Heene 11 Hendry 35 Heppard 2, 21, 35, 132 Hertz 78 Hickey 96 high performance ﬁrms 148, 149 Hill 11, 16, 163, 165 hi-tech SMEs 141 Hitt 1, 11, 2, 19, 20, 21, 22, 47, 70, 129, 131, 132, 143, 148, 161, 168 Hodgett 2, 133, 138, 139 Hofer 33 Holliday 91 Hollis 68 Hoskisson 10, 11, 19, 20, 47, 69, 70, 76, 129, 137 Howard 56

203

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Strategy Formulation in Entrepreneurial Firms

Hrebiniak 55, 56 Hughes 94 human resource 57, 194 development 179, 180, 181 Hunger 46, 1, 12, 157, 16, 19, 20, 21, 38, 55, 58, 80, 81 Hunt 75 Hurley 72 Huselid 180 hypothetic-deductive 75, 76 Ibrahim 133 ideas lens 136 implementing business plan 123 in-depth case study 76 inductive 70, 76 industry analysis 170 strength factors 117 informal ﬁnancial planning 111 strategic planning 111 Inkpen 170 innovation 136, 148, 149 performance 149 intended strategy 4 internal environment 83 factors 114 internationalization 48, 49 interview 85, 94 intuitive learning model 33, 34 involvement 138 Ireland 21, 22, 161, 168 Isaac 43, 77 Isabella 34 Jackson 139, 143 Jain 41 Jarillo 17 Jehiel 43, 77 Jennings 43 Johnson 2, 4, 5, 13, 33, 129, 136, 144, 146, 158, 159, 163, 165 Jones, A. 35 Jones, E.G. 80 Jones, G.R. 11, 16, 163, 165 Jones, P. 9 Jones, W.D. 141 Jordan 9 Joyce 55, 56

Judd 85, 86 Judge 70 Julian 42, 43 Jupp 90 Kakabades 3, 9, 44, 45, 46, 58, 106, 141 Kalai 55 Kaplan 124 Karami 1, 16, 43, 45, 130, 146, 178, 180 Katsikeas 141 Kawai 178 Keats 2 Ketchen 58 Kets De Vries 35 Kidder 85, 86 Kim 47 King 20 Kleindl 49 Klemm 45, 168 Kling 41 Knight 141 Koglmayr 178 Koh 143 Kohn 85 Kolenko 138, 182 Kolmogorove-Smirnove test 95 Komenar 53 Koontz 8 Kotler 177 Kovac 55, 56 Krishnan 1, 22 Kruskal-Wallis 97, 180, 181, 182 Kudla 76 Kuechler 48 Lahteenmaki 180 Lang 43, 175 Langer 74 Langﬁeld-Smith 124 leadership style 56 Learned 69 Leavy 6, 7, 34, 35 Ledyard 55 Lei 13, 15 Leidecker 32 Leig 33 Leonidou 141 Levy 33, 38 life cycle 193 Linneman 80 Lorange 56, 58

Index low performance ﬁrms 148, 149 Lowry 46 Luffman 9, 45, 46, 168 Lumpkin 43 Lundvall 173 Luttwak 3 Lynch 46 Ma 170 Maanen 72 Mabey 18 MacMillan 2, 21 Mahajan 175 mail questionnaire 87 Malhotra 67, 73, 85, 89, 91, 95 management deﬁnition 8 training 110 managerial characteristics 83, 105, 139 managing resources 146 Manion 85 Mann-Whiteny u test 97, 147 March 148 Marsh 3, 9 Marshal 73 Martell 180 Mason 10, 83, 139, 143, May 67, 73 McCabe 170 McCarthy 33, 38 McClelland 18 McDonnell 12, 13, 16 McEvily 170 McGee 158 McGrath 2, 21 McKenna 2, 171 McKiernan 18, 20, 21, 76 McMillan 70 McMullen 17 McNeill 76 measurement 91 methodology 67 Meyer 2, 21, 35, 44, 49, 51, 132, 159, 162 Miles 33, 135 Miller 2, 56, 76, 91 Mintzberg 1, 3, 4, 8, 32, 33, 34, 47, 7, 76, 77, 137 mission statement 44, 112, 135, 159, 166, 193 components 167 purposes 113

205

Monck 32 Montgomery 44, 46, 50, 51, 159, 160, 161, 162, 163 Moore 18 Morgan 68, 69 Morris 18, 20, 21, 76 Moutinho 80 Muldowney 20, 78 Muller 178 Murray 33 Mutal 133 Myers 9 Nachmias 75, 84, 86, 87, 88, 91, 94 Nanni 124 Narayanan 41 Nelson 146 Niv 43, 77 Noble 55, 56, 57 nominal level 91 non-parametric 95, 96 test 142 non-planning 134 Norburn 139, 143 North 33 Norton 124 Nutt 56 O’Brien 80 O’Gorman 20, 32, 33, 114, 125, 166, 167, 168, 169 O’Regan 178 objectives 76, 113, 160 observation 84 Ofﬁcial UK Labour Market Statistics 22 Ohmae 9, 47 Oladeji 55 operational decision making 123 ordinal level 91 organizational conﬂict 123 culture 123 economics 10 factors 122, 135 structure 56, 120 origin of strategy 2 Ormsby 2, 20, Orser 172 paradigm 8 parametric analysis 95, 96, 142

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Strategy Formulation in Entrepreneurial Firms

Parks 2 Parsa 57 Pearce 2, 13, 20, 32, 36, 45, 55, 76, 162, 163, 166, 168 Pearson 2, 76 Peel 1, 80, 133, 177 Pelham 173 performance 182 personal interview 86 Peter 45, 95 Pettigrew 9, 19, 21, 33 Pfeffer 9, 33 Phillips 80 Piercy 141 PIMS 124 Pisano 146 Pitts 13, 15 planning levels 134 model 32 policy implication 196 Pollard 42 Porter 1, 9, 10, 31, 32, 49, 50, 51, 56, 76, 158, 161, 162 positivism 67, 68 positivistic approach 67 primary data 85 problem solving 123 processes 162 product/market matrix 47 proposition 77, 78

Raymond 42, 43 realized strategy 4 Reeves 180 Reid 142 reliability 95 Remenyi 67, 70, 71, 75, 87, 89, 91, 92 research design 70 interview process 93 methodology 73 methods contingent approach 74, 75 strategy 69 process 75 variables 83 resource-based view 10, 146, 149 resources 160 Reuning-Elliot 35, 36 Rhyne 76 Robinson 13, 20, 45, 76, 162, 163 Robson 2, 19, 32, 55, 67, 70, 71, 73, 75, 83, 84, 85, 86 ROI 84, 168 Root 68 Ross 143 Rothaermel 9 Rousseau 57 Roux 140 Roy 136, 177 Rue 133 Rumelt 16, 50, 69, 76, 161,163

qualitative research method 72 quality of leadership 122 quantitative research method 71 process 72 questionnaire 87 construction 89 Quezada 124 Quinn 3, 4, 13, 18, 33, 34

Sadler-Smith 35 sample 78, 94 Sandberg 33 Sanderson 45, 168 Sapsford 90 Sarasvathy 21, 22, 175 Sawyer 43, 68 Saxena 137 Scarborough 130 Schakenraad 147 Schell 142 Schendel 3, 10, 69, 70, 76 Schlegelmich 143 Scholes 4, 5, 13, 129, 136, 144, 163 Schuler 181 Schultz 58, 138 Schumpeter 17 Schwenk 2, 21, 176 Scott 2, 32, 35, 79, 132

Rajagopalan 47 Ramangalahy 42, 43 Ramanujam 47, 180 Rangone 180 Rarick 45, 167 Rasheed 47 rational model or strategy 32 planning 33, 34

Index Seeger 80 Segal-Horn 3, 8 senior manager 138, 191 Serarols-Tarres 18 Shaw 132 Shay 9 Shrader 2, 20, 21, 32, 76, 80, 176 Shuen 146 Shuman 80, 132 Siegel 95, 96 Silverman 76 Singleton 91 Sirower 44, 159 Slevin 33 Smallbone 33 SMEs 22, 51, 76, 114, 175 characteristics 80 deﬁnition 79 Smircich 34 Smith 1, 20, 85, 86, 169, 173, 178 Snow 33, 135 Sormunen 2 specialization 46 SPSS 97 Stacy 7, 20 statistical tests 96 Stead 136 Steeneveld 31, 58 Stevenson 17 Stewart 125 Steyaert 35 Stoner 8 Storey 19, 180 Strategic awareness 144, 145, 191 business unit (SBU) 16 characteristics 182, 184 decision making 136 entrepreneurship 1 management 11, 12, 39, 190 approach 135 process 13, 139, 191 stages 15 orientation 140, 141 planning 35, 36, 110, 111, 132, 138 formal 176, 177 informal 176 nature 132 tools 166 vision 159 strategist 129

207

strategy deﬁnition 3 development 139, 143, 179 evaluation 16, 58 evolution 5 formulation 14, 15, 38, 80, 81, 83 process 192 implementation 16, 55, 80, 81, 84 SMEs 120 lenses 136 levels 158 management 9 models 6 patterns 4 perspective 4, 7 position 4 structure 162 Stubbart 34 successful entrepreneur characteristics 130 survey 89 questionnaire process 93 Sussman 132 SWOT 13, 80, 183 system 162 systematic approach 124 tangible resources 160 Tayler 76, 80 Teece 69, 76, 129, 146, 147 Tenenbaum 9 theoretical contribution 194 Thomas 73, 158 Thompson 1, 15, 32, 35, 46, 157 Timmons 18 Topol 1 Toulouse 2, 56 Truss 181 T-test 135, 145 Turban 52, 53 Tyler 143, 107 UK 93 Unni 20 Urata 178 Vanhala 180 Varadajan 47 Venkataraman 21, 22, 175 vertical integration 162 vision 45, 82, 159 visionary approach 76

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Strategy Formulation in Entrepreneurial Firms

Vitton 45, 167 Vollmann 124 Von Oech 144 Voss 55 Want 45 Ward 133 Wargin 75 Waring 136 Waters 33 Watts 2, 20 Web 9 Webb 19, 21 Weihrich 8 Wernerfelt 146 Wheelen 1, 12, 16, 19, 20, 21, 38, 46, 55, 58, 80, 81, 157 Whipp 33 Whittington 1, 7, 8, 129, 136, 144, 163 Wiersema 139, 143

Wilde 53 Wilder 54 Williamson 7 Wilson 34, 95, 158 Winter 146 Wit 44, 49, 51, 159, 162 Wolff 2, 172, 173 Woo 70 Wood 2 Woolridge 55 work experiences 106, 141 Wortman 129 Wright 80, 179, 180, 181, 182 Yesha 53 Yeung 44, 45, 159, 169 Zajac 15, 146 Zeithaml 70 Zimmerer 130